MCOSE 31 E SLM Merged Compressed

Master of Commerce
SECOND YEAR
(Semester - 03)
MCOSE -31
CUSTOMER RELATIONSHIP MANAGEMENT
School of Management Studies

Tamil Nadu Open University
577, Anna Salai, Saidapet. Chennai-600 015
www.tnou.ac.in
SYLLABUS
Course Title : CUSTOMER RELATIONSHIP MANAGEMENT
Course Code : MCOSE-31
Course Credit :3
COURSE OBJECTIVES (CO)
CO1. Describe the concept of Customer Relationship Management

(CRM) and types and various strategies of Customer viewpoint
CO2. Measure the customer satisfaction and loyalty in terms of CRM
CO3. Identify the path of Marketing services and its technological
implementation of CRM
CO4. Explain the feature of E-CRM and Enterprise Marketing
Automation tools for augmentation of business
CO5. Describe the insights of Customer Relationship Management
(CRM) and its implementation.
COURSE SYLLABUS
BLOCK I: Introduction to CRM
CRM concepts: Theoretical perspectives of relationship -CRM

Definitions - components of CRM - Stakeholders in CRM -Significance of
CRM -Types of CRM – strategies of CRM - customer life style and
customer interaction.
BLOCK II: Customer Satisfaction
Customer Satisfaction – Significance - Components of Customer
Satisfaction - Customer Satisfaction Models - Rationale of Customer
Satisfaction and measurement - Customer Loyalty - Customer Loyalty
Ladder - -Benefits of Customer Loyalty -Dimensions of Customer Loyalty
- Determinants of Customer Loyalty - Drivers of Customer Loyalty.
BLOCK III: CRM in Marketing
CRM in Marketing: One-to-one Relationship Marketing - Cross Selling &
Up Selling - Customer Retention - Behaviour Prediction - Customer
Profitability & Value Modeling - Channel Optimization- CRM and
Customer Service: The Call Centre - customer interaction, the
functionality, technological implementation, what is ACD (Automatic Call
Distribution), IVR (Interactive Voice Response), CTI (Computer
Telephony Integration)
a
BLOCK IV: Features of E-CRM
Features of e-CRM, Advantages of e-CRM, Technologies of e-CRM -
Sales Force Automation (SFA) – need and barrier of (SFA) - Field Force
Automation - Enterprise Marketing Automation (EMA) Components of
EMA, marketing campaign, campaign planning and management,
business analytic tools, EMA components (promotions, events loyalty
and retention programs), response management.
BLOCK V: Implementation of CRM
CRM Implementation – A comprehensive model - Developing CRM
vision and strategy Management support -Pre-implementation - kick off
meeting - requirements gathering - prototyping and detailed proposal
generation - development of customization - system optimization - follow
up.
REFERENCES
1. Garikaparthi, Madhavi, (2002) CRM – The New Face of Marketing;

ICFAI Press, Hyderabad.
2. Chaturvedi, Mukesh and Chaturvedi, Abhinav, (2006) Customer
Relationship Management, An Indian Perspective; First Edition,
Excel Books, New Delhi.
3. Ramana, V. Venkata, and Somayajulu, G, (2004) Customer
Relationship Management, A key to corporate success; First Edition,
Excel Books, New Delhi.
4. Jagdish N Sheth, Atul Parvatiyar, Shainesh G, (2014), Customer
relationship management : Emerging Concepts, Tools, &
Applications, Tata McGraw-Hill Education, New Delhi.
WEB RESOURCES
1. customer relationship management - Bing video

2. CRM-Customer Relationship Management.pdf - Google Drive
3. Customer Relationship Management (ku.ac.ke)
COURSE OUTCOMES (CLO)
On completion of this course, learners would be able to

CLO1. Apply the concept of CRM, the benefits delivered by CRM, the
situations in which it is used, the technologies that are
deployed.
CLO2. Design CRM strategies by understanding customers’
satisfaction and preferences for the long-term sustainability of
the Organizations.
b
CLO3. Implement various marketing and technological tools for data
mining and also successful implementation of CRM in the
Organizations
CLO4. Recognize about the new trends in e-CRM and its tools
challenges, and opportunities for organizations.
CLO5. Gain insight on technology implementations and discuss the
various stages in implementation and evaluation under CRM
c
UNIT/ CONTENT PAGE
BLOCKS NO.
BLOCK 1 INTRODUCTION TO CRM
UNIT 1 CUSTOMER DATA BASE ANALYSIS 2
1.1 Introduction 3
1.2 Types of customer categories 4
1.3 Information to be included in customer 4
database
1.4 Developing a customer information database 5
1.5 Customer profile 8
1.6 Some demographic changes those are likely 9
1.7 Factors influencing customer expectations of 11
services
UNIT 2 CUSTOMER PERCEPTION 14
2.1 perception 14
2.2 Strategies for Influencing Customer Perception 15
2.3 Customer Behaviour 16
UNIT 3 CUSTOMER LIFETIME VALUE 20
3.1 Introduction to Customer Lifetime Value 20
3.2 Customer Lifetime Value 21
UNIT 4 ACQUIRING CUSTOMERS 27
4.1 Customer Acquisition 28
4.2 Categories of Customer response behaviour 29
4.3 CRM Meaning 32
4.4 Success Factors of CRM 32
4.5 Stages of CRM 34
BLOCK 2 CRM STRUCTURES
UNIT 5 ELEMENTS AND STRUCTURE OF CRM 39
PROCESS
5.1 Elements of CRM 40
5.2 CRM Process 41
5.3 Strategies for Customer Acquisition 42
5.4 Customer Retention 42
d
5.5 Customer Defection 43
UNIT 6 MODULES AND ROAD MAP OF 58
IMPLEMENTING CRM
6.1 Models of CRM 48
6.2 CRM Road Map 55
UNIT 7 CRM IN MARKETING 60
7.1 CRM Marketing 60
7.2 Relationship between transaction marketing 61
and Relationship marketing
7.3 A CRM system 62
7.4 Business objectives of CRM 62
7.5 Essence of a CRM solution 63
7.6 CRM applications 64
7.7 One-to-One relationship marketing 65
7.8 Cross and up selling 70
UNIT 8 SALES FORCE AUTOMATION 76
8.1 Introduction 76
8.2 Types of sales include 78
8.3 CRM links in E-business: E-commerce and 86
customer relationships on the internet
BLOCK 3 CRM PLANNING AND IMPLEMENTATION
UNIT 9 CRM PLANNING AND IMPLEMENTATION 96
PROCESS
9.1 Introduction 97
9.2 Identifying business processes 98
9.3 Creating proposals 100
UNIT 10 TYPES AND TOOLS OF CRM 105
10.1 Introduction 106
10.2 Meaning of E-CRM 107
10.3 Evolutions of E-CRM 108
10.4 Working of E-CRM 111
10.5 Implementation of an E-CRM system 111
10.6 Pit falls in CRM implementation 112
10.7 Types of CRM programmes 113
e
UNIT 11 CRM IMPLEMENTATION ROAD MAP 121

11.2 Building CRM project foundation 123
11.3 Implementing the CRM project 126
11.4 Performance evaluation 126
UNIT 12 CUSTOMER CENTRIC MARKETING 130
12.1 Benefits of customer-centric marketing strategy 131
12.2 Engage customers 133
12.3 Research on customers 133
12.4 Collect customer feedback 134
12.5 Ways to collect the feedback 136
12.6 Ways to measure our customer-centric 139
marketing growth
BLOCK 4 SERVICE QUALITY
UNIT 13 SERVICE QUALITY AND CUSTOMERS 144
EXPECTATIONS
13.1 Meaning of Service quality 145
13.2 Customer Expectations Management 146
13.3 Customer Expectation 146
13.4 Customer Expectations for services 150
13.5 Factors That Influence Adequate Service 151
13.6 Perceived quality 152
UNIT 14 SERVICE QUALITIES AND DIMENSIONS 156
14.1 Service quality meaning 156
14.2 Types of service quality 157
14.3 Dimensions of Service Quality 159
14.4 Gaps in service quality. 160
UNIT 15 MEASURING SERVICE QUALITY 169
15.1 Measuring service quality 169
15.2 Purpose of measuring service quality 171
15.3 Mode of measuring service quality 171
15.4 Ten determinants of service quality 172

15.5 Effective ways to measure service quality 174
f
BLOCK 5 TRENDS IN CRM
UNIT 16 CRM: DATA WAREHOUSING AND DATA 183
MINING AND SOFTWARE PACKAGES
16.2 Relationships among CRM, Data Warehouses 195
& Data Mining
16.3 Major Benefits for a company that uses CRM 201
16.4 An introduction to CRM packages 202
UNIT 17 MARKET BASKET ANALYSIS (MBA) 207
17.1 Introduction to Market Basket Analysis (MBA) 208
17.2 Types of Market Basket Analysis 211
17.3 Algorithms associated with Market Basket 212
Analysis
17.4 Benefits of Market Basket Analysis 213
UNIT 18 CHANGING CORPORATE CULTURES 217
CONTEMPORARY ISSUES
18.2 Cultural challenges 219
18.3 contemporary challenges in CRM 222
Plagiarism Report 228
g
BLOCK 1
INTRODUCTION TO CRM
UNIT 1 : CUSTOMER DATA BASE ANALYSIS
UNIT 2 : CUSTOMER PERCEPTION

UNIT 3 : CUSTOMER LIFETIME VALUE
UNIT 4 : ACQUIRING CUSTOMERS
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UNIT 1
CUSTOMER DATA BASE ANALYSIS

STRUCTURE
Overview
Learning objectives
1.1 Introduction
1.2 Types of customer categories
1.3 Information to be included in customer database

1.3.1 Customer information.
1.3.2 Information to be included in customer database
1.3.3 Benefits of a customer database

1.4 Developing a customer information database
1.4.1 Process of analysing customer information database
1.5 Customer profile
1.5.1 Components of customer profile
1.5.2 Changing shopper demography
1.6 Some demographic changes those are likely

1.6.1 Changing customer demography
1.6.2 Changes in shoppers value and lifestyle
1.7 Factors influencing customer expectations of services

1.7.1. Managing customer expectations
Let us sum up
Check your progress

Glossary
Suggested readings
Answer to check your progress

OVERVIEW
In this 21st century maintain a customer has become a Hercules task. To
retain a customer, we need to understand about his expectations and
needs. As per the present scenarios the business which is able to
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maintain customer database will be leading and sustaining in this
business world. Therefore, it is a mandatory requirement for all business
units to understand and maintain customer information.
LEARNING OBJECTIVES
After studying this unit, you will be able to:
• explain the role and importance of customer for a business
• assess the need for and importance of customer database.
• discuss the purpose of maintain and analysing customer profile.
1.1 INTRODUCTION
A customer can be a person or company that receives, consumes
or buys a product or service and can choose between different goods
and suppliers. The main goal of all commercial enterprises is to attract
customers or clients and make them purchase what they have on sale.
They also try to encourage them to keep coming back. At the core of
marketing is having a good understanding of what the customer needs
and values. We often refer to customers who are product users of our
products and as clients. Have a relationship with the supplier as clients.
Also, people who hire the services of a professional are clients, not
customers. For example, a lawyer has clients.
When a customer buys something, the seller immediately focuses on the
next one. However, with a client, the aim is to cultivate the relationship.
In many cases, the client-supplier relationship becomes similar to a
partnership. This does not tend to happen with customers.
Customer and Consumer
Customers are often also consumers. In other words, they are often the
ultimate users. The terms ‘customers’ and ‘consumers’ mean the same
thing if the person who buys something also consumes or uses it.
Customers, unlike vendors or resellers, are usually (but not always) the
end users of any good or service that they have paid for.
Even though the two terms are very similar, there is a basic difference.
Customers are human beings, companies, or entities that purchase
goods and services.
As soon as customers consume what they purchased, they are also
consumers. For us to class anybody as a consumer there must be some
consumption or usage.
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Sometimes customers and consumers are not the same people. For
example, if I buy baby food, I am the customer, but my baby daughter is
the consumer. She consumes the food, not me. We also use the term
‘ultimate consumer’ to emphasize where the end of the road is for the
product or service.
1.2 TYPES OF CUSTOMER CATEGORIES
There are many different types of customers:
B2C: B2C stands for Business-to-Customer. For example, when I buy a
coffee at a stall at the train station, it is a B2C event.
B2B: The term stands for Business-to-Business. For example, when the
coffee stand owner buys coffee from a supplier; both of them are
businesses.
C2B: C2B stands for Customer-to-Business. For example, when I sell
my gold ring to a pawnbroker or jewellery store.
C2C: C2C stands for Customer-to-Customer. For example, when I want
to sell my car privately to another person. eBay is a huge C2C and B2C
marketplace.
1.3 CUSTOMER INFORMATION DATABASE
The true business of every company is to make and keep customers.

The single most important factor for the success of any business
enterprise is the customer. Understanding the customer needs and
wants is the important factor for selling of our product and services.
1.3.1 Customer Information
The most often used information in a CRM database is the customer
information. This can include personal information, such as contact
addresses and phone numbers, as well as family size, location, and
other demographic information. Many companies also use their CRM
database to record purchase information, service calls, customer
support needs, and even warranty information. Anything relative to
customer interaction can be placed in a CRM database.
• Customer information database includes personal information,
such as contact addresses, phone numbers etc.
• It also includes family size, location and other demographic
information and geographical location.
• CRM database to record purchase information, service calls,
customer support needs, and even warranty information.
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• Customer related databases might be maintained in a number of
functional areas, e.g. Sales, marketing, logistics and accounts.
• Customer Information Database
• Databases might require quite different operational purposes
E.g.: Opportunities, campaigns, enquiries, deliveries and billing.
• Customer related data can have current, past and future
perspectives, focusing upon current opportunities, historic sales
or potential opportunities etc.
1.3.2. Information to be included in customer database
• Contact names
• Job title and job definitions
• Demographic or psychographic information
• Name of the company
• Address
• Methods of contact
• Buying history
• Sources of lead
• Sources of sale
• Special needs of customers
1.3.3 Benefits of a customer database
By using a customer database to keep in touch with, and market to, our
customers, you can:
• Increase awareness of our brand
• Enhance marketing opportunities
• Build and strengthen relationships between you and our
customers
• Build trust in our products and services
• Increase our profits
1.4 DEVELOPING A CUSTOMER INFORMATION DATABASE
1. Define the database functions
• Strategic CRM: Data about markets, market offering, customers,

channels, competitors, performance and potential.
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• Operational CRM: Customer related data to help in the everyday
running of the business.
• Analytical CRM: Data to support the marketing, sales and
services decisions that aim to enhance the value created for and
from the customers.
• Collaborative CRM: It includes two subsets of operational and
analytical purpose. (OLTP, OLAP) online-transaction, A-analytical
processing.
2. Define the information requirements
• Customer information fields

• Contact data
• Contact history
• Transactional history
• Current pipeline
• Opportunities: It looks forward after sales.
• Products
• Communication preferences
3. Identify the information sources
• Internal data: market size, market segmentation, customer
profile, customer acquisition channel, competitor product and
pricing, customer requirement
• External data:
a) Compiled list data:
b) Census data: obtained from govt records.
c) Modelled data generated by third parties includes variety of
sources.
• Secondary and primary data:
a) Competition entries
b) Subscriptions: customer subscribe of newsletter or magazine
c) Registrations: customers are invited to register their
purchase
d) Loyalty programs
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4. Select the database technology and hardware platform
• Hierarchical
• Network
• Relational: assign unique number in rows and columns and
assign other data of marketing, service, payments and so on.
5. Hardware Platform
• Size of the databases: using of PC and server
• Existing technology: using software
• Number and location of users
• Relational Database Management System (RDBMS)
• Populate the database
• Sourcing: obtain information from customer
• Verification
Validation
1. Range validation: Does an entry lie outside the possible range for
a field.
2. Missing values: Check for values that are missing in column.
3. Check against the external values: check the details with mail
authority.
De-duplication
1. Remove the record that should be retained
2. Retain the record that should be removed
3. Merge and purge
6. Maintain the Database
• All new transactions, campaigns and communications are
inserted immediately.
• Regularly re duplicates the database.
• Get customers to update their own records (online purchase)
• Audit the subset of files every year.
• Drip-feed.
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1.4.1 Process of analysing customer information database
• Extract (information)
• Clean
• Merge &
• Analyze
1.5 CUSTOMER PROFILE
The definition of Customer profiling is” a description or analysis of a
typical or ideal customer for one's business” Harper Collins
Publishers. Customer profiling is a marketing tool that businesses use
to understand their customers and helps to make better business
decisions.
• A good method of identifying and understanding customers is to
develop a customer profile.
• This approach is similar to use in market segmentation.
• The marketers create some basis for dividing the various
customer groups.
• The marketer then develops a typical customer profile which
helps to analyze and understand consumer behavior.
1.5.1 Components of Customer Profile

Customer profile analysis
Customer profile that gives an indication of who might typically use their
outlet. A customer profile is affected by the macro business
environment.
A customer profile is also influenced by the micro-environment, the
specific business arena in which the individual market operates.
The perspective of changing consumer profile can be very important to
the marketer in order to adequately manage the marketing mix and
formulate a marketing strategy.
• Changing customer profile includes into two categories.
➢ Changing customer demography
➢ Changing in consumer values and lifestyle.
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1.5.2 Changing Shopper Demography
• Demographics comprise selected characteristics of a population
(Age and income distribution and trends, mobility, educational
attainment, home ownership and employment status.)
• The study of the population in terms of measurable aspects such
as birth rate, age profile, working pattern and occupation, total
income and expenditure levels.
• The changes are out of the marketer‘s control.
1.6 SOME DEMOGRAPHIC CHANGES THOSE ARE LIKELY TO
IMPACT ON THE BUSINESS
1. Generation cohorts.
2. Age profile
3. Income and Expenditure
4. Ethnic Diversity
5. Working patterns
1. Generational cohorts (buddies or followers)

• Those who share historical or social life experiences. These life
experiences tend to distinguish one generation from another.
• Members of the generation groups are linked through shared

experiences which create a bond tying member together in what
has termed as cohorts.
• Generation cohorts includes
a) Seniors before 1946 (conformity, conservatism, traditional
family values, team player)
b) Baby boomers 1946-1964 (experimental, individualism, free
spirited, less optimistic)
c) Generation X 1965-1976 (quest of emotional security,
independent, informality, entrepreneurial)
d) Generation Y 1977-1994 (physical security and safety,
patriotism, heightened fears, acceptance of change) balance.
b/w work and lifestyle.
e) Tweens 1995 to till date (Belief in individuality, technology
interpreted, fast face living)
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1.6.1 Changing customer demography
a) Age profile (falling population of teenagers)
b) Income and Expenditure (The changes in income brought
changes in spending pattern of the consumers)
c) Ethnic Diversity (Differences in groups, culture, customs, religion
etc)
d) Working patterns (The trend of more women's to enter into

workplace. Increasing of working time in workplace)
1.6.2 Changes in shoppers value and lifestyle
• Changing shopping perspective.
• Changing patronage for different retail format
• Attitude towards shopping:
1. Shopping experience
2. Attitudes towards shopping time
3. Changing feelings about retailing
4. Reasons for buying or not buying
5. Attitude by market segment
6. Attitude towards private brand
• Impulse purchase and customer loyalty:
1. Impulse purchase
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a. completely unplanned
b. Partially unplanned
c. unplanned substitution
2. Customer loyalty.
1.7 FACTORS INFLUENCING CUSTOMER EXPECTATIONS OF
SERVICES
• Sources of desired service expectations (desired services
Zone of tolerance adequate service)
1. Personal needs
2. Enduring service intensifiers - desired service expectations
• Sources of Adequate service expectations
1. Transitory service intensifiers (urgent need-small purchase,
doctors, etc.)
2. Perceived service alternatives (booking of tickets)
3. Customer‘s self-perceived service roles (food service in
hotel)
4. Situational factors (petrol bank, food served for marriage)
5. Predicted services (give quality service rather than predicted
service)
• Sources of both desired and predicted service expectations
1. Explicit services promise (ad -we promises to customers)
2. Implicit service promises (two company charges diff. prices)
3. Word-of-mouth communication
4. Past experience (previous exposure to the focal firm‘s service )
1.7.1. Managing customer expectations
• During pre-purchase phase
1. Learn what customers expect
2. Tell customers what they can expect
3. Consistently provide the service that customers expect.
• During the service encounter
• During the post-purchase phase
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LET US SUM UP
From this unit, we have learnt different types of customers and how to
maintain their database. This would also help you to understand the
customer profile. We have also understood what is needed by customer
and how to meet their expectations. Only if we are able to provide what
customer needs, we will be able to survive in the market.
CHECK YOUR PROGRESS
Choose the correct answer
1. According to ___, CRM is an iterative process that turns customer
information into positive customer relations.
a) Ronald S. Swift b) Stanley A. Brown
c) Chris Todman d) Gartner Group
2. Which of the following options includes relationship management with

external stakeholders in the value chain?
a) Analytical CRM b) E-CRM
c) Collaborative CRM d) EAI
3. ___ is important to develop and evaluate the results of marketing
interactions. (Pick the right option)
a) Campaign management tools b) Interfaces
c) Analytical tools d) Data warehouses
4. The ___ of CRM deals with communication between companies and

their customers. (Pick the right option)
a) Collaborative feature b) Operational feature
c) Analytical feature d) Automation feature
5. Which among the following is defined as an ability to track and

respond to clients in an individualized manner?
a) Personalization b) Automation
c) Inbound management d) Outbound management
GLOSSARY
Customer journey : A customer’s entire purchase lifecycle, from
the moment he or she indicates a desire to
purchase to the post-sale phase.
CRM : Customer Relationship Management — or
CRM — describes the manner in which a
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business initiates and fosters relationships
with leads and customers. It’s aimed at
delivering good customer experience in
order to extend customer lifetime value.
Data security : Customer data is typically protected by our
CRM software. This may include any
additional details of the customer that is
considered confidential information and
includes contact details
Data sharing rules : Data Sharing Rules are guidelines to
ensure the confidential data remains
confidential. You can apply these rules to
individuals, teams, and functions.
Invoice : An invoice is a bill or commercial report that
a supplier gives to a consumer that details
the items, quantities, and agreed-upon
value for products or services.
Prospect : A potential customer that marketing or
sales determines is a good match for the
product or service and in the position to
complete the buying process.
SUGGESTED READINGS
1. Jadish Seth, et al, Customer Relationship Management
2. Kaushik Mukherjee, Customer Relationship Management, Prentice
Hall of India Private Limited, New Delhi, 2008
3. S. Shanmugasundaram, Customer Relationship Management,
Prentice Hall of India Private Limited, New Delhi, 2008
WEB RESOURCES
1. Customer Database Template | Track, Manage and Analyze
customer data in Excel! - Bing video
2. CRM Database Part 2. Track sales. Report on marketing.
Manage clients. Microsoft Access CRM database - Bing video
3. What is a CRM Database and how do you use it? - Bing video
ANSWER TO CHECK YOUR PROGRESS
1. a) 2.c) 3 a) 4.a) 5.a)
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UNIT 2
CUSTOMER PERCEPTION
STRUCTURE
Overview
Learning Objectives
2.1 Perception
2.1.1 Customer Perception Analysis
2.1.2 Factors Influencing Customers Perception Analysis

2.2 Strategies for Influencing Customer Perception
2.3 Customer Behaviour
2.3.1 Customer Behaviour in Relationship Perspective

2.3.2 Factors Influencing Consumer Behaviour
Let Us sum up
Check your progress
Glossary
Suggested readings

OVERVIEW
In this unit, we are going to learn about customer perception about
various services and products. We are also going to learn about
customer’s behaviour as an individual and as a member of a group.
LEARNING OBJECTIVES

• discuss the importance of customer perception.
• assesses the behavioural relationship of customer.
• examine individual and group behaviour of customers.

2.1 PERCEPTION
According to kolasa,’ perception is selection the outside environment at
one time or the other to provide the meaningful entity we experience.’
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According to Robbins, "perception may be defined as a process by
which individuals organize and interpret their sensory impressions in
order to give meaning to their environment”.
2.1.1 Customer Perception Analysis
• Customer perception analysis is a value-chain assessment
methodology that gives a better understanding of one‘s
interaction with customers.
• Perception is a process through which the in selected, received,
organized and interpreted to make it meaningful.
2.1.2 Factors Influencing Customers Perception Analysis

a. Exposure- attention(ad)
b. Interpretations (It involves making sense out of stimulus)
c. Relevance –several other factors (substitute)
d. Surprising stimuli
e. Subliminal stimuli
f. Selective perception process

g. Selective Exposure
h. Selective Attention
i. Selective Comprehension
j. Selective Retention
2.2 STRATEGIES FOR INFLUENCING CUSTOMER PERCEPTION
i. Measure and manage customer satisfaction and service quality
ii. Aim for customer quality and satisfaction in every service
encounter-zero defects
iii. Plan for effective recovery
iv. Facilitate adaptability and flexibility
v. Encourage spontaneity
vi. Help employees with problem customers
vii. Reflect evidence of service
viii. Enhance customer perception of quality and value through
pricing
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2.3 CUSTOMER BEHAVIOUR
Customer or consumer behaviour is the study of how individuals make
decisions to spend their valuable resources (Time, money, effort) on
consumption-related items. It includes what they buy it, why they buy it,
where they buy it, how often they buy it, and how often they use it.
According to belch and or is the process belch and activities consumer
people engage behaviour in when searching for, selecting, purchasing,
using, evaluating and disposing of products and services so as to satisfy
their needs and desires.
2.3.1 Customer Behaviour in Relationship Perspective
• Understanding customer is the central part of the marketing
process to know why a customer or buyer makes a purchase.
• Without such an understanding, business will and wants.
• Some business still produces the product without knowing the
importance of the customer.
• Organization clearly understands the benefits wanted by

customers, reasons for purchase, re-purchase etc.
• Importance of customer behaviour
• Production policies
• Price policies
• Decision regarding channel of distribution
• Decision regarding sales promotion
• Exploiting market opportunities
• Customers do not always act or react predictably.
• Consumers preferences are changing and becoming highly
diversified.
• Rapid introduction of new products
i. Factors Influencing Consumer Behaviour

I. Psychological factors
a. Motivation
b. Perception
c. Learning
d. Beliefs and attitude
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II. Personal Factors
a. Age and Life cycle stage
b. Occupation
c. Lifestyle
d. Personality and self-concept
III. Cultural factors
a. Culture
b. Subculture
c. Social class
IV. Social factors
a. Reference groups
b. Family
c. Roles and status
Fig.2.1. Factors Influencing Consumer Behaviour

Role of a People in Buying Decision
• Initiator
• Influencer
• Decider
• Gatekeeper
• Buyer
• User
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Buying decision of customers
• What to buy?
• How much to buy?
• Where to buy?
• When to buy?
• How to buy?
LET US SUM UP
From this unit, we can understand that customer perception paly`s a
very vital role in decision making of a product purchase. We have
understood various factors influencing the purchase decision and
various people involved in purchase decision making.
CHECK YOUR PROGRESS
1. Percentage or number of customers who move from one level to next
level in buying decision process is called
a) Conversion rates b) marketing rates
c) Shopping rates d) loyalty rates
2. Customized products and services for customers and interaction to
individual customers are part of
a) Retailers’ Management
b) Customer Relationship Management
c) Company Relationship Management
d) Supplier Management
3. Person or company that yields revenue more than incurred costs of
selling and serving is called
a) Dissatisfaction b) Superior Value
c) Profitable Customers d) Satisfied Customers
4. Customers lifetime purchases that generate net present value of
future profit streams is called
a) Customer lifetime value b) customer purchases value
c) Customer cost incurred d) customer relationships
5. First step in analysis of customer value is to

a) Identify Customers Value Attributes
b) Assessing Attributes Importance
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c) Assessing Company\S Performance
d) Assessing Competitors Performance
GLOSSARY
Knowledge Base : A company’s support materials are stored in a
Knowledge Base, which is an online archive.
Customers may use it to troubleshoot issues
or learn more about how a product or service
operates.
KPI (Key : Customer relationship management KPIs are
Performance a set of predetermined achievable targets for a
Indicators) company that can include any aspect of the
business that is considered critical to its
success.
KYC : KYC stands for “Know Our Customer” or
“Know Our Client” in some cases. KYC (Know
Our Customer) defines and checks a client’s
identity when they open an account and
regularly afterward. CRMs typically offer
different versions, including eKYC and video
KYC.
SUGGESTED READINGS
WEB RESOURCES
1. Customer Management | What is Customer Relationship
Management? | Great Learning - Bing video
2. Customer Relationship Management (CRM) - Pharmacy
Operations Basics - Bing video
3. Introduction to Customer Relationship Management - Bing video
ANSWER CHECK YOUR PROGRESS
1. a) 2. b) 3. c) 4. a) 5. a)
19
UNIT 3
CUSTOMER LIFETIME VALUE

STRUCTURE
Overview
Learning Objectives
3.1 Introduction to Customer Lifetime Value
3.1.2 Selection of Profitable Customer Profitability
3.2 Customer Lifetime Value

3.2.1 Customer Value Leads to Growth
Let us sum up
Check your progress

Glossary
Suggested readings
OVERVIEW
Customer is our asset all else our responsibility. To retain customer is
not an easy task for any business in the present competitive world.
Therefore, to survive in the business we need to understand the
concepts of customer lifetime value which is to assess the expenses
spent to retain a customer and the return we have received in doing so.
LEARNING OBJECTIVES
• describe the concepts and importance of customer lifetime value

• find the selection parameters for profitable customer segment
• gain knowledge in depth concepts of CLV for improving customer
services...
3.1 INTRODUCTION CUSTOMER LIFETIME VALUE
• Customer lifetime value (CLV), lifetime customer value (LCV), or
lifetime value (LTV) is the net present value of the cash flows
attributed to the relationship with a customer.
• The use of customer lifetime value as a marketing metric tends to
place greater emphasis on customer service and long-term
20
customer satisfaction, rather than on maximizing short-term
sales.
• Building Profitable Customer-Centric Strategies: Maximizing
Profit Potential
• Our high-impact processes for becoming more customer-centric
and creating innovative strategies will be valuable only if we can
effectively deliver on these profitably.
3.1.2 Selection of Profitable Customer Profitability
• We first understand the key factors that will drive profitability for
customer insight initiatives.
• During the innovation stage, the objective was to creatively
generate new sources for capturing intelligence from customers
and creating insight that could enhance the way we communicate
and sell to customers.
• As you learn more from customers about their needs and
preferences, you have the opportunity to better target our
marketing messages, offers and channels, which ultimately leads
to reduced marketing expenses and increased conversion rates.
3.2 CUSTOMER LIFETIME VALUE

The key factors that will drive the profitability of customer insight
initiatives include these:
• Reaching high-value customers and prospects
• Capturing intelligence on a critical mass of customers to justify the
fixed costs of setting up and managing the program
• Generating incremental profits from increased sales to new
customers, higher customer retention, selling more to existing
customers or winning back lost customers
• Reducing costs of delivering solutions and servicing customers
• Capturing intelligence cost-effectively
• Building the ability to influence customer profitability over time
21
3.2.1 Customer Value Leads to Growth
Growth is important to virtually every business, and there are only a few
generic approaches to growth. A firm can acquire new customers or rely
on old customers. A firm can expand into the sale of new products and
services or rely on the traditional product mix. The success of each
approach to growth is dependent upon one thing, delivering better value
than the competition.
The growth matrix of the customer value includes four combinations:
Existing Customers - Existing Products: This growth strategy
probably has the greatest potential for growth but is often overlooked.
Very few businesses have a 100% share of a customer’s expenditures.
Normally a customer will purchase from several competitors.
Example: A grocery shopper may shop at four grocery stores during a
month. Or a lady may purchase clothes at four or five stores. Or a
couple may dine at numerous restaurants. In each case, a particular
store may have only 30 - 40% of a customer’s expenditures.
If a firm could move from an average share of expenditure of 30% to an

average share of expenditure of 40%, it would have a 33.33% sales
increase. And if it went from 30% to 60%, its revenues would double.
Unfortunately, many firms assume that all customers are loyal, devoted,
and make 100% of their expenditures with a firm. However, this is
22
seldom the case. Most firms have no idea of what share of expenditure
they are getting from their customers. Studies have shown that the best
predictor of share of spend is the customer’s perception of value. The
greater the customers’ perception of value, the greater will be the share
of pocketbook of a firm.
Existing Customers - New Products: This growth strategy occurs
when a firm tries to build upon an existing relationship with customers by
offering new products. It could be a restaurant that adds a home delivery
or take-out option to a dining operation. It could be a grocery store that
adds floral, video rentals, and film developing. It could be a
telecommunications firm offering an array of new services, such as caller
identification, voice messaging, or call forwarding.
The key to success here is that the new products must be a logical
extension of the core competence of the firm and create good value for
the customer. The economic landscape is littered with the remains of
firms that fiercely clung to the “traditional mode of operation” and were
passed by firms willing to innovate with new value propositions.
Unfortunately, the customer’s desires are often not readily apparent. The
implication is that a firm must understand how a customer perceives a
value proposition and to tie the new product to that perception.
Existing Products - New Customers: The focus of this growth strategy
is on market expansion through the acquisition of new customers.
Domestically, this means capturing more shares from traditional
competitors.
In slow growth markets, this is usually quite difficult. But the key success
factor remains the same; create better value for the customer than the
competition.
The most common marketing strategy is to hire a sales force and invest
them to acquire new customers. Make no mistake, acquiring customers
through internal growth or acquisition is critical for the long-term growth
of a firm. But those newly acquire customers must be retained to be
valuable. And retaining new customers can be accomplished only be
delivering good customer value relative to the competition.
New Products – New Customers: This growth strategy is one of

diversification. The biggest challenge here is for managers to gain an
awareness of the new expected value proposition. Managers must learn
what the key drivers of value are for new customers. And at the same
23
time, they must align internal processes to create value in fundamentally
new product offerings. Because the benefit of experience is lacking, this
is usually the highest risk growth strategy.
If the new products are simply an extension of traditional products, then
the benefit of experience may be at least partially transferable. But the
challenge of creating better value for new customers with new products
while competing against new competitors is daunting.
LET US SUM UP
From the above content it is understood how and why we retain
customers and how we can generate funds by retaining them.
Importance on spending for a customer retention programme.
CHECK YOUR PROGRESS
1. An efficient synchronization system must: (Choose the false option)
a) Support large-scale field implementation
b) Give flexible support for the server database

c) Be dependent on the database
d) Easy to use
2. Which of the following options is linked to order management?

a) Improves financial planning by easily tracking sales pipeline
b) Maintains audit information automatically
c) Associates opportunity data records with purchase decisions
d) Exports and imports account data
a) Collaborative feature
b) Operational feature
c) Analytical feature
d) Automation feature
4. In ___, active management and assessment of products and services
take place. (Pick the right option)
a) Intelligence phase
b) Value creation phase
24
c) Integration phase
d) Initial phase
a) Campaign management tools
b) Interfaces
c) Analytical tools
d) Data warehouses
GLOSSARY
Customer Journey : A customer’s entire purchase lifecycle, from

the moment he or she indicates a desire to
CRM : Customer Relationship Management — or

CRM — describes the manner in which a
business initiates and fosters relationships
with leads and customers. It’s aimed at
delivering good customer experience in
order to extend customer lifetime value
Lead : A potential customer in the initial phase of

the sales funnel. Leads may originate from
referrals, people who respond to a
campaign, lists of names, and other sources
Cases : Cases are complaints, consumer reviews, or

challenges that the clients are experiencing.
These reports help improve our customer
service and product range.
Custom Links : Custom Links are one-of-a-kind links that

enable users to access third-party apps and
URLs when using the CRM.
REFERENCE BOOKS
25
2. Kaushik Mukherjee, Customer Relationship Management,
3. S.Shanmugasundaram, Customer Relationship
Management, Prentice Hall of India Private Limited, New
Delhi, 2008
WEB RESOURCES
1. CLTV Customer lifetime value, marketing analytics, measuring
customer life time value, aktu mba note - Bing video
2. R Tutorial: Customer Lifetime Value in CRM - Bing video
3. CVM - 2.1 - Customer Lifetime Value - YouTube

ANSWER FOR CHECK YOUR PROGRESS
a) c) 2.a) 3.a) 4. c) 5.a)
26
UNIT 4
ACQUIRING CUSTOMERS
STRUCTURE
Overview
Learning objectives
4.1 Customer Acquisition
4.2 Categories of Customer response behaviour
4.2.1 Traditional Approach to Customer Acquisition

4.2.2 Customer Acquisition Strategy
4.3 CRM Meaning
4.4 Success Factors of CRM

4.5 Stages of CRM
Let us sum up
Check Your progress
Glossary
Suggested readings
Answer for Check Your progress
OVERVIEW
We are now going to understand how to acquire customer who is very

important for our business. Not only acquiring him but also how to
convert him into a loyal customer is the next task for marketing manager
of 21st century. The present-day customer is internet savvy and has all
the information in click of a mouse so. Retaining and converting a
customer into a loyal customer is not an easy task.
LEARNING OBJECTIVES
• discuss the concept of and need to acquire customers.
• find strategies for acquiring customers

• describe the need and purpose of having loyal customers
• list out the success factors of successful CRM programme
27
• Following steps for successful CRM program to a business.
• Understand the methods of maintaining sales profile.
4.1 CUSTOMER ACQUISITION
One of the primary areas of growth for an organization is the acquisition
of new customers.
• Customer acquisition involves identification of potential
customers, understanding their strengths and weaknesses, risk
assessment and formulation of an acquisition strategy.
• The explosion of customer segments, products, media vehicles,
and distribution channels coupled with intense competition bent
on growth has made the acquisition of new customers more
complex, more costly, and less effective than ever.
Today’s consumer is more demanding, more informed and more able
and prepared to “vote with their wallet” if they don’t get what they want.
Some Key Concepts
There are usually many kinds of customers, and it can often take a
significant amount of time before someone becomes a valuable
customer.
• When the results of an acquisition campaign are evaluated, there

are often different kinds of responses that need to be considered.
The responses that come in as a result of a marketing campaign
are called “response behaviour.
• Response behaviour defines a distinct kind of customer action
and categorizes the different possibilities so that they can be
further analyzed and reported on.
• Binary response behaviours are the simplest kind of response.
With binary response behaviour, the customer response is either
a yes or no. If someone is sent a catalogue, did they buy
something from the catalogue or not?
• Beyond binary response behaviours are categorical response
behaviours. As you would expect, categorical response
behaviour allows for multiple behaviours to be defined.
• The rules that define the behaviour are arbitrary and are based
on the kind of business you are involved in. These behaviours
can be refined a far as deemed necessary, for example,
“purchased men’s red polo shirt.”
28
4.2 CATEGORIES OF CUSTOMER RESPONSE BEHAVIOUR
1. Customer inquiry: The customer asks for more information about
our products or services. This is a good start.
2. Purchase of the offered product or products: This is the usual
definition of success. You offered our products to someone, and they
decided to buy one or more of them.
3. Purchase of a product different that the ones offered: Despite
the fact that the customer purchased one of our products, it wasn’t
the one you offered. You might have offered the deluxe product and
they chose to purchase the standard model (or vice-versa).
There are also typically two kinds of negative responses.
• The first is a non-response. This is not to be confused with a
definite refusal of our offer. For example, if you contacted the
customer via direct mail, there may be any number of reasons
why there was no response (wrong address, offer misplaced,
etc.).
• The lack of response does not necessarily mean that the offer
was rejected. As a result, the way you interpret a non-response
as part of additional data analysis will need to be thought out
(more on this later).
Customer Relationship Management
A rejection (also known simply as a “no”) by the prospective customer is
the other kind of negative response. Depending on the offer and the
contact channel, you can often determine exactly whether or not the
customer is interested in the offer (for example, an offer made via
outbound telemarketing might result in a definitive “no, I’m not
interested” response).
4.2.1 Traditional Approach to Customer Acquisition
The traditional approach to customer acquisition involved a marketing
manager developing a combination of mass marketing (magazine
advertisements, billboards, etc.) and direct marketing (telemarketing,
mail, etc.) campaigns based on their knowledge of the particular
customer base that was being targeted.
In the case of a marketing campaign trying to influence new parents to
purchase a particular brand of diapers, the mass marketing
advertisements might be focused on parenting magazines (naturally).
The ads could also be placed in more mainstream publications whose
29
readership demographics (age, marital status, gender, etc.) were similar
to those of new parents.
New customers are the hardest and most expensive to get. You will
spend more time, money and energy attracting new customers to our
business.
Many companies have adopted customer relationship management
(CRM) systems that can support both acquisition and retention by
gathering data from every contact with prospects and customers.
4.2.2 Customer Acquisition Strategy

Now let us discuss the strategies that affect the acquisition of customers:
Supporting Acquisition
Most acquisition marketing campaigns begin with the prospect list. A
prospect list is simply a list of customers that have been selected
because they are likely to be interested in our products or services.
• The goal for the acquisition phase of our program should be
deciding which prospects most closely match our company’s “ideal
prospect” profiles.
• This simple decision helps focus our marketing and acquisition
efforts while saving costs and increasing our Return on Investment
(ROI).
Analyzing our marketing campaigns to determine which are most
effective in bringing in new customers is also important. A CRM system
that is able to tag data (assigning each contact to a specific campaign)
lets you analyze the return on the investment you are making in our
marketing effort as well as its overall effectiveness in identifying likely
prospects.
30
There are a number of other questions you should consider as you
develop the acquisition part of the data strategy. For example,
1. What is our best source of customers?
2. Did they find us on their own initiative or were they referrals?
3. Did they come from external sources such as a direct marketing
list or were they from our own marketing campaigns?
4. When customers first contact us, what information are they
interested in?
5. What was the ROI for that campaign?
6. Was it self-service or assisted interaction that eventually leads to

a sale?
Keep in mind that prospects may have significantly different information
and support needs than customers and use this knowledge to tailor our
acquisition program to their needs.
a) Test Campaigns
• Unless you have data available from previous acquisition

campaigns, you will need to send out a test campaign in order to
collect data for analysis.
• Besides the customers you have selected for our prospect list, it
is important to include some other customers in the campaign,
so that the data is as rich as possible for future analysis.
• It will be difficult to expand future campaigns to include segments
of the population that are not in our initial prospect list. The
solution is to include a small random selection of customers
whose demographics differ from the initial prospect list.
• The random selection should constitute only a small percentage
of the overall marketing campaign, but it will provide valuable
information for data mining. You will need to work with our data
vendor in order to add a random sample to the prospect list.
• More sophisticated techniques than random selection do exist,
such as those found in statistical experiment design and Multi-
Variable Testing (MVT).
c) Evaluating Test Campaign Responses
• Once you have started our test campaign, the job of collecting
and categorizing the response behaviour begins.
31
• In most real-world situations, though, there is a threshold after
which you no longer look for responses. At that time, any
customers on the prospect list that have not responded are
deemed “non-responses.”
• Before the threshold, customers who have not responded are in
a state of limbo, somewhere between a response and a non-
response
4.3 CRM - MEANING
Customer relationship management is the technique of providing
information to prospects and customers, and collecting information about
prospects and customers, that allows us to help them evaluate and
purchase products that deliver the best possible value to them.
One-to-one marketing, and relationship marketing is to make it easier for
the customer to do business with you.
Customer Relationship Management has become a popular name for a
variety of software tools and techniques aimed at attracting and retaining
customers. In general, CRM uses a centralized database to bring
marketing and sales activities together in a unified approach to serving
customers.
One-to-one marketing and relationship marketing is to make it easier for
the manufacturer to do business.
• Marketing and sales people have many opportunities to influence
customer purchase decisions by the way making smooth
relationship with the customer.
• The concept of relationship management with respect to the
customer, to get efficiency (cost reduction) and responsiveness
(instant delivery).
4.4 SUCCESS FACTORS OF CRM
The eight main factors responsible for the success of CRM. The factors
are:
1. Top Management Commitment and Support

2. Define and Communicate CRM Strategy
3. Culture Change
4. Inter-Departmental Integration
5. Skilful Staff
6. Key Information on Customers
32
7. Manage IT Structure
8. Customer Involvement.
1. Top Management Commitment and Support
Top management involvement in the CRM implementation plan has
been identified in almost all success factors studies as a crucial factor
that ensure the successful implementation of CRM.
2. Define and Communicate CRM Strategy
• A clear definition of the CRM strategy and alignment of this
strategy to the company’s strategy would facilitate the transition
of changing work structure and environment toward customer-
centric approach.
• Publishing the strategy to the staff is required to raise their
awareness of the CRM objectives, implications, and benefits.
3. Culture Change
Organization should develop a culture where all staff are encouraged to
share and learn from new work structure and information that is based
on customers.
4. Inter-Departmental Integration
• Different functions and departments of the organization should

be integrated and connected with a structure that supports the
flow of information.
• A special consideration should be devoted to functions that have
direct interaction with customers such marketing, sales, and
services.
5. Skilful Staff
Employees play a key role in the success of CRM projects. Issues of the
nature of learning new work systems, training programs, change
resistance, willingness to share information, and motivating staff should
be taken to consideration.
6. Key Information on Customers:
Acquiring and analyzing the right quantity and quality of information on
customers helps to meet customer’s needs. The right information is the
base for designing customized products and services.
33
7. Manage IT Structure
• IT is an enabler for acquiring and managing valuable data on
customers.
• Technological aspects such as data warehouse capabilities and
software configuration in addition to the influence of the internet
are crucial for CRM successful implementation
8. Customer Involvement
• Direct and indirect Involvement of customers in CRM designing is
a tool for strengthening practical CRM.
• Involvement helps the organization to analyze the customer
relationship life cycle and consequently find the areas of
problems that can be managed by CRM.
4.5 STAGES OF CRM
• The advent of Mass Production in the early 20th century, followed
by an explosion in the demand for goods after World War II,
increased the power of suppliers at the expense of consumers,
and thus reduced the importance of customer service.
• The manufacturers could produce what they could, and these
goods will find their way to customers on their own.
• There was no need for customer service as an activity or as a
tool for promotion or enhancement of markets.
• A shift in this balance began in the 1970, as international
competition increased, and the dominance of western
manufacturers was challenged, first by Japan, then by Korea,
China and other developing economies.
• New world emerged with these Eastern economies taking to
tremendous growth Producers responded by improving the
quality of their products and services.
• They introduced to the world entirely a new concept—the
concept of simplicity and convenience and economy to the world.
• The economic boom of the 1990s again increased the power of
suppliers who, while not completely reverting to lower standards
of service, were able to be more selective of which customers to
serve, and of what levels of service to provide.
• The overall quality of customer service - in society and in specific
industry- will continue to be determined by the relative balance of
power between suppliers and consumers.
1. The changes in market demand and competitive strategy forced
the company to change from transactional marketing to
relationship marketing.
34
2. Marketing mix was developed in the 1950s in order to exploit
market demand. all the p‘s of marketing helps to explore
increased demand of the company‘s products and services.
3. The objective of transactional approach of marketing is to sell
more products and services to maximize sales and profit.
4. Increased competition and matured markets have led to the low
growth. Which results in increased pressure and corporate
profitability?
5. The beginning of globalization of markets, new competitions led
to the greater customer choice.
6. Companies must move from a short-term transaction- long term
relationship building goal.
7. Companies are competing successfully in domestic and global
markets including customers, distributors, employees, unions and
governments.
8. The term marketing domain is defined as stakeholders who have

to be taken into consideration in order to develop relationships
and to achieve long-term success in the final marketplace.
9. The increased importance of relationship marketing also led to an

increasing demand for an efficient customer relationship
management.
10. The task of finding who our customers are?
11. What they exactly want and providing it seems to be a task with
difficulties.
12. Understanding and management of customer‘s expectations is
rather a key to success in order to be able to create satisfied
customers.
13. Customer knowledge is required to satisfy their customers and
reach the ultimate goal of a company.
14. Create customer knowledge and the utilization of the customer
relationship management system is essential.
LET US SUM UP
From this unit we have learnt different types of customers, success
factors to retain a customer and how to maintain their loyalty. This would
also help you to understand the customer profile. We have also
understood what is needed by customer and how to meet their
35
expectations so that they are our repeated customers and also become
loyal customers. Only if we are able to provide what customer needs, we
will be able to survive in the market.
CHECK OUR PROGRESS
a) Ronald S. Swift b) Stanley A. Brown
C) Chris Todman d) Gartner Group
2. Which of the following options includes relationship management with
external stakeholders in the value chain?
a) Analytical CRM b) eCRM
c) Collaborative CRM d) EAI
a) Campaign management tools b) Interfaces
c) Analytical tools d) Data warehouses
a) Collaborative feature b) Operational feature
c) Analytical feature d) Automation feature
5. Which among the following is defined as an ability to track and
respond to clients in an individualized manner?
a) Personalization b) Automation
c) Inbound management d) outbound management
GLOSSARY
Customer : A customer’s entire purchase lifecycle, from the
Journey moment he or she indicates a desire to
CRM : Customer Relationship Management — or CRM
— describes the manner in which a business
initiates and fosters relationships with leads and
customers. It’s aimed at delivering good
customer experience in order to extend
customer lifetime value.
Data Security : Customer data is typically protected by our
CRM software. This may include any additional
details of the customer that is considered
36
confidential information and includes contact
details
Data Sharing : Data Sharing Rules are guidelines to ensure the
Rules confidential data remains confidential. You can
apply these rules to individuals, teams, and
functions.
Invoice : An invoice is a bill or commercial report that a
supplier gives to a consumer that details the
items, quantities, and agreed-upon value for
products or services.
Prospect : A potential customer that marketing or sales
determines is a good match for the product or
service and in the position to complete the
buying process.
SUGGESTED READINGS
WEB RESOURCES
1. Customer Relationship Management - Bing video
2. Introduction to CRM - Customer Relationship Management
Systems | Class - Bing video
3. Introduction to Customer Relationship Management - Bing video
1. a) 2. c) 3.a) 4.a) 5.a)
37
BLOCK 2
CRM STRUCTURES
UNIT 5 : ELEMENTS AND STRUCTURE OF CRM

PROCESS
UNIT 6 : MODULES AND ROAD MAP OF
IMPLEMENTING CRM
UNIT 7 : CRM IN MARKETING
UNIT 8 : SALES FORCE AUTOMATION
38
UNIT 5
ELEMENTS AND STRUCTURE OF CRM

PROCESS
STRUCTURE
Overview
Learning Objectives
5.1 Elements of CRM
5.1.1 Customer Knowledge
5.2 CRM Process

5.2.1 Three Steps of CRM Process
5.3 Strategies for Customer Acquisition
5.4 Customer Retention
5.4.1 Strategies for Customer Retentions
5.5 Customer Defection
5.5.1 Types of Defection
5.5.2 Strategies for Prevention of Defection
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
Customer relationship management is arrear which should be
concentrated by all business units. It should be given top priority by
business units to retain them in the current business scenario. In this
unit we would learn about various elements of CRM, process in
implementation, acquiring them and retailing the loyal customers by
attracting new customers.
39
LEARNING OBJECTIVES
• describe the need for and importance of customer retention
• explain the steps and process of CRM
• apply tools and techniques to maintain, retain, and acquire
customer.
• assess strategies for attracting new customers.
5.1 ELEMENTS OF CRM
When our company communicates with our customers the process can
involve many different people within both organizations using a variety of
different methods. The main tool that is used is an order that is
communicated by our customer to our sales department. To ensure that
our company can provide the best customer service experience possible
the use of customer relationship management (CRM) software should be
considered.
5.1.1 Customer Knowledge

The customer service function in our company represents the front office
functions that interact with our customers. These are the business
processes that allow our company to sell products and services to our
customers, communicate with our customers with regards marketing and
dealing with after-sales service requirements of our customers. Each
interaction with the customer is recorded and stored within the CRM
software where it can be retrieved by other employees if needed.
• Relationship Strategy
• Communication
• Individual Value Proposition
• Sales Force Automation
The company‘s sales department is constantly looking for sales
opportunities with existing and new customers. The sales Force
automation functionality of CRM software allows the sales teams to
record each contact with customers, the details of the contact and if
follow up is required. This can provide a sales force with greater
efficiencies as there is little chance for duplication of effort. The ability for
employees outside of the sales team to have access to this data ensures
that they have the most recent contact.
5.1.2 Campaign Management

40
The sales team approach prospective customers in the hope of winning
new business. The approach taken by the sales team is often focused
on a campaign, where a group of specific customers are targeted based
on a set of criteria. These customers will receive targeted marketing
materials and often special pricing, or terms are offered as an
inducement. CRM software is used to record the campaign details,
customer responses and analysis performed as part of the campaign.
5.2 CRM PROCESS
• Formation process-- decisions regarding initiation of relational
activities for a firm.
• In the formation process, there are three important decision areas:
defining the purpose (or objectives) of engaging in CRM; selecting
parties (or customer partners) for appropriate CRM programs; and
developing programs (or relational activity schemes) for relationship
engagement with the customer.
5.2.1 Three steps of CRM process

1. Acquisition: It comprises enquiry, interaction, exchange, co-
ordination and adaptation.
2. Customer Interaction Management

3. Customer Retention
1. Customer Acquisition
• Customer acquisition is a broad term that is used to identify the
process and procedures used to locate, qualify, and ultimately
secure the business of new customers.
• Customer retention effort is to identify and quality potential
customers.
a) Inputs for Acquisition
The purpose of customer acquisition an organization is likely to focus its
attention on the following
a) The suspects
b) The enquiries
c) The lapsed customers
d) The former customers
e) The competitors customers

f) The competitors lapsed customer‘s
41
g) The competitor‘s enquiries
h) The competitors former customers
i) The referrals
j) The existing customers
5.3 STRATEGIES FOR CUSTOMER ACQUISITION
1. Focused Approach:
A) Knower B) Preferer C) Indifferent D) Rejecters
2. Providing a Win-Win Platform
3. Institute Forum for Communication
4. Attempt to Minimize ― Food (Fear, Uncertainty, Doubts)
5. Projection of Benefits and Not Products
6. Contextual Application
7. Focus on Decision Process

5.4 CUSTOMER RETENTION
Customer retention is the activity that a selling organization undertakes
in order to reduce customer defections.
Successful customer retention starts with the first contact an
organization has with a customer and continues throughout the entire
lifetime of a relationship.
A company‘s ability to attract and retain new customers, is not only
related to its product or services, but strongly related to the way it
services its existing customers and the reputation it creates within and
across the marketplace.
5.4.1 Strategies for customer retentions
1. People
2. Product
3. Process
4. Organisation
5. Setting Satisfactory Service Standards
6. Concentration on Competitors
7. Customer Analysis
8. Cost Analysis
9. Concentration on the Paying Ability of Customers
10. Knowledge on Purchase Behaviour Pattern
11. Differentiation in Prices and Quality Standards
42
12. Focus on Reducing Dissatisfaction
13. Attention on Changing Requirement of Customers
14. Concentration on Performance
15. Training to Supply Chain Employees
16. Empowerment to Service Providers
17. Incentivizing Service Providers
18. Augmenting intangible benefits
19. Visit to the point of usage of the product
20. Develop partnership with customers
21. Organizing customer clubs
22. Relationship based pricing schemes
23. Effective customer communication system
24. Customer compliant monitoring cell
25. Developing customer satisfaction index
26. Focus on preventive actions
27. Concentration on customer satisfaction research
28. Focus on focus group
29. Building switching barriers
5.5 CUSTOMER DEFECTION

Customer defection is the rate at which customers defect or stop the
usage of products of a company. Business with high defection rate
would be losing their existing customers.
In order to overcome this, they use another term of customer retention,
in simple words it’s to retain or prevent the existing customers to defect
the product.
5.5.1 Types of Defection
• Price Defectors
• Product Defectors
• Service Defectors
• Market Defectors
• Technological Defectors
• Organisational Defectors
43
5.5.2 Strategies for prevention of defection
Every customer that you keep represents at least three that you don’t
have to attract. Numerous research studies indicate that the cost of
acquiring a new customer usually runs from two to four times the annual
cost of keeping an existing customer. Obviously, an effective customer
retention strategy translates into profits.
Superior service and database management provide our best
defence against customer defections. The Key Points Are
• Analyze customer defections and monitor declining accounts
• Address key churn drivers

• Implement effective complaint-handling and service recovery
procedures
• Increase switching costs.
LET US SUM UP
From this unit, we have come to know the need for and importance of
customer retention for a business to survey in the market. We have also
understood various strategies for retaining customers and points to be
concentrated to retain customers. This unit also has explained how to
stop customer defection.
CHECK YOUR PROGRESS
1. CRM is a business philosophy that aims at maximizing ___ in the long
run
a) Organization value b) Customer value
c) Business value d) d. Software value
2. Enhance Customer Relationship Management started in ___.
a) 1980 b) 1970
c) 1990 d) 1985
3. A successful CRM increases production and profit throughout the ___.
a) System life cycle b) Business life cycle
c) Customer life cycle d) Organization life cycle
4. The ___ feature of CRM deals with communication between
companies and their customers.
a) Collaborative b) Operational
44
c) Analytical d) Automation
5. CRM system generates ___ throughout interactions on different
channels.
A) 340-degree customer view
B) 350-degree customer view
C) 360-degree customer view
D) 370-degree customer view
GLOSSARY
Company : Organization-specific details such as business

Details: hours, currency, fiscal year, company logo, etc.,
that are displayed in places like email signatures,
orders, invoices, etc.
Campaigns : A tool that helps you plan and monitor email

marketing campaigns in our business
Customization : The process of modifying or altering various

elements in our CRM accounts to match our
business requirements.
Marketing : A feature made up of six models which help in

Attribution calculating the exact ROI value for the
campaigns.
Transition : A link between two states in Blueprint and

Command Center. It prescribes the conditions
that are needed for a record to move from one
state to another
Tags : Keywords assigned to a record for ease of

identification. Tags can be used to segregate
records for workflows and create custom list
views by defining criteria based on our
requirements.
SUGGESTED READINGS
1. CRM at the Speed of Light: Capturing and Keeping Customers in
Internet Real Time, Paul Greenberg
45
2. Customer Relationship Management: A Strategic Perspective,
G Shines, Jadish N Sheath.
3. Developing Knowledge-Based Client Relationships: The Future of
Professional Services (Knowledge Reader), Ross Dawson
WEB RESOURCES
1. CRM PROCESS - Bing video
2. Introduction to Salentica Elements - Product Overview - Bing
video
3. Elements of CRM Strategy - Bing video

1.b) 2.c) 3.c) 4.a) 5.c)
46
UNIT 6
MODULES AND ROAD MAP OF

IMPLEMENTING CRM
STRUCTURE
Overview
Learning objectives
6.1 Models of CRM
6.1.1 IDCI
6.1.2 QCI
6.1.3 Payne‘s Five-process model
6.2 CRM Road Map
Let Us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
CRM is a very important component for a business unit. Implementing a

CRM program will support a business unit to survive and competes in
the present business world. To implement CRM program is not an easy
task and is not a hard and fast rule to be followed, it varies according to
the type and size of the business. So, this unit would through light on
various models available and the road map for implementing the same.
LEARNING OBJECTIVES
• explain the various models of CRM
• point out the advantages and disadvantages of each model and
the formation of each model.
• discuss the road map for implement the model.
47
6.1 MODELS OF CRM
It’s five times cheaper to keep an existing customer than to gain a new
one. But how do you promote customer loyalty and retain our best
customers?
Customer Relationship Management (CRM) helps businesses develop
strategic processes to win the loyalty of their best customers and
improve the buyer experience.
There are several different strategies or models for customer
relationship management. We’ll cover four of the most common CRM
models briefly below.
Fig- 6.1: IDIC Model

6.1.1 IDIC model
The IDIC model was developed by the Peppers and Rogers Group as a
generic blueprint for implementing CRM in a variety of situations. IDIC
stands for the four stages of CRM implementation: identify, differentiate,
interact, and customize.
1. Identify
• Identify our customers like the customer’s name, address, and
purchase history at each point of contact across the company.
• The goal is to collect as much information or data as you can on
each customer.
2.. Differentiate
• Differentiate or segment our customers based on their current
and projected lifetime value.
48
3. Interact
• Once our customers are analyzed and categorized, you can
develop customized interactions—for example, for valued
customers, you might offer loyalty benefits or rewards to
encourage retention and continued spending.
Keep in mind, you should be learning from each interaction to
continuously improving the future interactions.
4. Customize
You analyze them to develop more customized one-to-one service. The
goal is to ensure that our customers’ needs, and expectations are met
and that you have pinpointed them individually (or very narrowly).
6.1.2. Quality Competitive Index (QCI) Model
• Quality Competitive Index Model (QCI model) is a customer
management model.
• This model describes the technology usage in the assisting
process performed by people.
• The QCI model discusses the customer relationships process
without the external environment, and that process affects the
organisation’s planning activities.
• The focus of the QCI model is the customer, not
the CRM process itself.
• Customer management has three distinct factors: namely,
acquisition, retention and penetration.
In order to be successful in the CRM implementation strategy (Buttle
2009). QCI is described as a customer management model rather than a
customer relationship model.
The QCI model starts with the customer’s external environment at the
top—their pain points, business goals, and other factors will affect the
customer experience.
The customer experience then affects customer proposition (what you
offer the customer) and customer management activities. The QCI
model also considers the people and technology involved with keeping
this whole system going. Although QCI has replaced the word
“relationship” in CRM, this model still starts and ends with people.
49
Fig 6.2: Quality Competitive Index (QCI) Model
1. Analysis and planning

• Analysis of customer behaviour and planning to develop the value
of the company.
• The analysis and planning are based on the REAP of customer
management activities, which is Retention, Efficiency, Acquisition,
and penetration.
2. Proposition
• The proposition includes processes that can attract new
customers, which depends upon the evaluation of the needs of
the customers in the previous step.
• The segmentation of customer needs to form the base for
different propositions.
3. Information and Technology (IT): Information and technology is an
enabler in managing customers as well as customer-related data.
Technology helps deliver critical information related to the customers to
the organization and vice-versa. This element includes important sub-
processes such as:
• sourcing customer information,
• planning and analyzing information,

• management of quality and review of technology systems for
replacement and renewal
4. People and organization: A business cannot manage customers

without a robust team of customer relationship executives. As per the
QCI model, the business needs to develop and maintain a responsible
team for:
50
• managing customer requests,
• feedback,
• Queries and concerns.
Also, businesses need to establish a system for role identification, task
segregation, and conduction of gap analysis for training
5. Process management: Coordinating marketing, sales, and customer
support are essential for customer management, as per the QCI model.
According to this model, a consistent process which provides continuous
management support to customers and identifies shortcomings is
important.
6. Customer management activity: This element of the QCI model has
three sub-categories of activities, governed by efficiency in all.
• Acquisition: It includes targeting of customers and getting to
know their needs for developing products/ services.
• Penetration: This sub-activity includes understanding the
customers through the collection of information, which can be
then processed to understand how to best create a valuable
customer base. The activities involve simple messages to
welcome customers to the organization, provide an
understanding of the business activities and helping customers
connect with the business goals.
• Retention: This can be done through value development, as well
as through win-back strategy. This strategy serves as a retention
process and an acquisition process.
7. Measuring the effect: This element involves the assessment of the
process to ensure continuous improvement of the customer
management process. The measurement also helps understand the
level of performance of individuals and teams on their roles and creates
benchmarking on customer management success.
8. Customer experience: Addition of customer experience to the
customer management mix provides an additional layer of
measurement. It bridges gaps in customer perception and customer
enhancement processes.
• The QCI model provides a detailed process of how to establish a
connection with customers, cordially interact with them, and
customer management.
51
• The model also accepts the role of external environment in
impacting customer experience and provides an understanding
of how to counteract any negative aspects by making sure the
foundation of the CRM processes.
6.1.3 Payne‘s Five-process model
Payne’s Five Processes Model helps to improve Customer Relationship
Management (CRM) which makes acquisition and retention of
customers a priority. It includes processes that can help to build and
maintain relationships with customers. The model was established by
Adrian Payne and Pennie Frow in 2005 to identify and assess processes
relevant to CRM.
The model discusses the relevance of various processes, namely
• strategy development process
• value creation process
• multichannel integration process
• performance assessment process, and

• Information management or analytical process in CRM.
Each of the above is a cross-sectional, process-oriented approach and
is interlinked. Payne and Frow extensively reviewed literature, along with
field-based interactions, to develop a comprehensive process that would
aid in developing a sound CRM strategy. Through their research, Payne
and Frow stressed the importance of having CRM at strategic level.
Figure 6.3: Payne’s Five Process Model (Payne & Frow, 2006)
52
Strategy development and value creation process are a part of
strategic CRM. The multichannel integration process is a part of
operational CRM. Information management and performance
assessment processes are a part of analytical CRM.
1. Strategy development in Payne’s Five Processes model
The strategy development process is further divided into two parts:
business strategy and customer strategy. For business strategy, a
business needs to develop a vision in relation to its offerings. The
purpose is to create a goal to establish itself as a key player in the
industry. This model suggests that invariably:
• business strategy paves the way for understanding,
• how customer strategy needs to be shaped and,
• How it should change over time in conjunction with the changing
needs of the customers.
According to Payne and Frow, it is important to examine both current
and potential customer base as a part of customer strategy. It helps with
appropriate segmentation and identifying future actions to tackle
different customer needs.
2. Value creation process

The value creation process of Payne’s Five Processes model involves
identifying the value of a customer to the business and vice-versa. The
business needs to understand which customers are valuable through the
process of value proposition and value assessment.
This process, as per the model, needs to be transformative as per the
results received from the strategy development so that value is extracted
and transformed into meaningful propositions. Payne’s Five Processes
model explains that there are 3 aspects of effective value creation.
• Firstly, the organization needs to determine which processes can
create value for the customer.
• Secondly, identify customers who can add value to the
organization.
• Thirdly, identify how to maximize value in desirable customer
segments for a successful exchange of values.
53
3. Multichannel integration process
• It involves converting the insights from these processes to
outputs in value-adding activities.
• It helps businesses to focus on making decisions that integrate
all channels and ensure the customer experience is positive.
• This helps in better CRM implementation for a greater success of
the organization.
4. Performance assessment process
• To understand how well the value proposition of the business is
and whether the customer’s interest is leading to better business
performance.
• According to Payne’s Five Processes model, performance
assessment of business should also include monitoring of
customer satisfaction and analysis of Key Performance
Indicators (KPIs).
1. Information management or analytical process
• It is a support to the other processes. Payne’s Five Process
model suggests collecting, organizing, and using information
related to customers helps with insights on consumer behaviour.
• It helps businesses to create appropriate marketing responses
and improve value propositions. To manage such activities,
businesses should develop a data repository system with data
analysis tools
• These applications can help keep the CRM process a
comprehensive one for quantitative and qualitative
measurement of market competitiveness
Application of Payne’s Five Process Model of CRM in an e-
commerce business
• E-retailers have majorly benefitted from this model. Integrating
Payne’s Five Process model is very important to provide a
customer-based value proposition.
• E-retailers work to build CRM strategy by engaging customers,
offering value propositions such as discounts, loyalty privileges
and priority shipping.
• Multi-channel integration can also be included from customer
reviews, customer service, and e-mail support as well as return
policies.
• Performance of the CRM process can also be assessed from the
online traffic, time spent on browsing and surfing habits.
54
Assessing what factors trigger purchase intention can help create
better value propositions.
Payne’s Five Process model evaluated the correlation between business
processes, prospects and customers. The various processes
encompass the spectrum of CRM, right from the strategic point of view
to assessing the performance of customer engagement. Every process
supports itself and other processes, with each task being interdependent
for success.
6.3 CRM IMPLEMENTATION ROADMAP
1) A CRM Roadmap is a strategic plan that identifies how a company
can meet and exceed its customers ‘needs. This includes, but is
not limited to, assessing how the sales, marketing, and service
entities work together to: 1) Gain insight from their customers
2) Produce valuable offerings/products (for example, personalized
product); and
3) Provide the ultimate customer experience.

Developing a CRM Roadmap involves aligning an organization‘s
business strategy with its prioritized CRM capabilities. For example, if a
company‘s business strategy is to develop products faster to gain unique
market positioning, the capabilities that the company needs to master
should be aligned with that strategy, and might include:
• Leveraging customer information from the service process (for
example, integrating customer feedback during service calls with
the marketing department).
• Effectively managing product mix (measure success by campaign).
• Effectively managing sales channel strategy (eliminate conflict
between distribution channels).
So how do companies know which CRM capabilities they have, and
when they will need to realize their strategic goal? Below are the eight
primary steps (which have been used across industries, including
financial services, electronics and high-tech, consumer products,
manufacturing, etc.) to follow when developing a CRM Roadmap.
• Scenario Analysis
• Purpose and Objectives
• Business Planning
• Process Design
55
LET US SUM UP
In this unit we have covered the important models of CRM which can be
used for implementing as per the industry. There is no hard and fast
rule that only a particular model to be implemented. As per the size and
requirement of the industry the models can be used. This unit stands as
a guiding road map on how we can implement CRM program in a
business unit
CHECK YOUR PROGRESS
1. Customer managed relationship

a) Batch processing d b) permission marketing
c) One-to-one marketing d) data mining
2 Customer Relationship Management is about
a) acquiring the right customer
b) instituting the best processes
c) motivating employees
d) all of the above
3. CRM technology can help in
a) designing direct marketing efforts
b) developing new pricing models
c) processing transactions faster
d) all of the above
4. Process of manage information about customers to maximize loyalty
is said to be
a) Company Relationship Management
c) Supplier Management
d) Retailers Management
5. In buyer decision process, percentage of potential customers in a
given target market is called
a) customer funnel
b) company funnel
56
c) marketing funnel
d) retailers funnel
GLOSSARY
Vendors : A tab or module that is used to store information

about vendors. You can view details of contacts
and the products and orders that they are
associated with in the module.
Visits : A tab or module that stores information about

website visitors.
Segmentation : A method used to categorize our customer base

into different groups based on their purchasing
patterns. Segmentation uses the RFM
(Recency, Frequency, and Monetary) metrics to
segregate customers.
Server-Side : Tools to create client applications that let you

SDKs easily access the required APIs.
Solutions : A system-defined module that stores solutions

for the cases or issues raised by customers.
SUGGESTED READINGS
1. Abdul-Muhmin, A. G. (2012). CRM technology use and
implementation benefits in an emerging market. Journal of
Database Marketing & Customer Strategy Management.
2. Debnath, R., Datta, B., & Mukhopadhyay, S. (2016). Customer
Relationship Management Theory and Research in the New
Millennium: Directions for Future Research. Journal of
Relationship Marketing.
3. DeNisi, A., & Pritchard, R. (2006). Performance appraisal,
performance management and improving individual performance:
A motivational framework. Management and Organization
Review.
4. Labus, M., & Stone, M. (2010). The CRM behaviour theory –
Managing corporate customer relationships in service industries.
Journal of Database Marketing & Customer Strategy
Management.
57
5. Payne, A., & Frow, P. (2006). Customer Relationship
Management: from Strategy to Implementation. Journal of
Marketing Management.
6. Pinnington, S., & Jones, M. (2015). Performance Measurement
for Customer Relationship Management (CRM). In
Developments in Marketing Science: Proceedings of the
Academy of Marketing Science (DMSPAMS) Springer.
WEB RESOURCES
1. B2B Selling - Building Road Map Implementation Plan - YouTube
2. CRM for Lightning Experience | Salesforce in tamil |

techplantofficial - YouTube
3. SAP ABAP - Introduction to ERP - Bing video
4. Basics of Zoho CRM - Bing video
5. Introduction to Model,Project VS | Microsoft dynamics 365 tutorial
|CRM | finance and operations - Bing video

1. a) 2.d) 3.d 4.a) 5.c)
58
UNIT 7
CRM IN MARKETING
STRUCTURE
Overview
Learning objectives
7.1 CRM Marketing
7.1.1. CRM: a business strategy for growth
7.2 Relationship between transaction marketing and

Relationship marketing
7.2.1 Implementing CRM
7.3. A CRM system

7.3.1 Uses of CRM
7.4 Business objectives of CRM
7.5 Essence of a CRM solution
7.6 CRM applications
7.7. One-to-One relationship marketing
7.8. Cross and Up selling

Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Marketing is a vide subject. CRM is a part of Marketing. The purpose of
marketing is to buy and sell products in the market. But when we have to
either buy or sell a product or a service in the 21st century we need to
have easy access and database of our customers. To maintain the
database and reach customers we are in need of have a dedicated team
to work on it. CRM is a helping aid to support businessmen to go ahead
with their consumers. In this unit we would make an attempt to
understand the requirements of CRM and how it can support for
business expansion.
59
LEARNING OBJECTIVES
• define Customer Relationship Management marketing
• list out the importance of one-to-one marketing
• explain the business objectives of CRM
• analyze customer profitability and value Modelling
• analyze CRM and customer service
• explain the concept of Call Centre and customer satisfaction
measurement
7.1 CRM MARKETING
Introduction: The concept of managing relationships with customers is
not new. Companies have been interfacing with customers since the
beginning of trade. However, the focus has always been to sell the
products or services, as opposed to focusing on Customer Retention.
Competition, driven by globalization and the Internet, has changed the
face of business. Customers now have a variety of choices and, most
importantly, they are becoming far more knowledgeable and demanding.
The power has truly shifted to the customer. With this scenario, most
companies realize that they need to treat their customers with more
care. Companies are now desperately searching for different ways to
manage customer relationships effectively, not only to acquire new
customers, but also to retain the existing ones. According to a Harvard
Business Review Study, some companies can boost their profits by
almost 100% by retaining just 5% or more of their existing customers.
7.1.1 CRM: A Business Strategy for Growth
• CRM is not a product or service; it is an overall business strategy
that enables companies to manage customer relationships
effectively.
• It provides an integrated view of a company’s customers to
everyone in the organization so that the customer can be
serviced effectively. For example, if marketing runs an outbound
campaign, all the information about the customers and the
program should be retained for the sales people to follow up, the
customer service people to answer any queries, and technical
support to provide any field support.
60
• The idea is to have the same information shareable with all in the
company. This will enable the company to present a uniform face
to its customers when called upon to serve their needs.
• Such a CRM strategy also implies that the enterprise is
customer centric.
7.2 Relationship between transaction marketing and relationship
marketing
• Customer Relationship Management — or CRM — describes the
manner in which a business initiates and fosters relationships
with leads and customers. It’s aimed at delivering good customer
experience in order to extend customer lifetime value.
Relationship
Dimension Transaction Marketing
Marketing
Time Perspective Short-term Focus Long term focus
Interactive Marketing
Marketing Mix
(supported by
Dominating Marketing
marketing mix
activities).
Customer tend to be
Function Price
more sensitive to price
elasticity, dominating Customers tend to
quality of output
quality Measurement be less sensitive to
(technical quality)
of customer price
becomes dominating
satisfaction.
monitoring market share
(indirect approach)
Quality of interaction
Customer information Ad hoc customer functional quality
system satisfaction surveys. (Dimension) grows in
important and may
become dominating.
Interdependency Interface of no or limited
Managing the
between marketing strategic importance
customer database
operations and .internal marketing of no
(Direct approach)
personnel or limited importance to
success
Real time customer
feedback system.
Role of internal Interface of
Marketing substantial strategic
importance to
success.
7.2.1 Implementing CRM

61
• It is a corporate level strategy, focusing on creating and
maintaining relationships with customers. Several commercial
CRM software packages are available which vary in their
approach to CRM.
• CRM governs an organization’s philosophy at all levels,
including policies and processes, front of house customer
service, employee training, marketing, systems and information
management.
• CRM systems are integrated end-to-end across marketing,
sales, and customer service
7.3. A CRM SYSTEM
A CRM System Should
• Identify factors important to clients
• Promote a customer-oriented philosophy
• Adopt customer-based measures
• Develop end-to-end processes to serve customers

• Provide successful customer support
• Handle customer complaints
• Track all aspects of sales

7.3.1 Uses of CRM
In its broadest sense, CRM covers all interaction and business with
customers. A good CRM program allows a business to acquire
customers, provide customer services and retain valued customers.
Customer services can be improved by:
• Providing online access to product information and technical
assistance around the clock
• Identifying what customers value and devising appropriate
service strategies for each customer
• Providing mechanisms for managing and scheduling follow-up
sales calls
• Tracking all contacts with a customer
• Identifying potential problems before they occur
• Providing a user-friendly mechanism for registering customer
complaints
• Providing a mechanism for handling problems and complaints
62
• Providing a mechanism for correcting service deficiencies
• Storing customer interests in order to target customers selectively
• Providing mechanisms for managing and scheduling
maintenance, repair, and on-going support
7.4 BUSINESS OBJECTIVES OF CRM
CRM applications, often used in combination with data warehousing, E-
commerce applications, and call centres, allow companies to gather and
access information about customers’ buying histories, preferences,
complaints, and other data so they can better anticipate what customers
are looking for.
The other business objectives include:
• Increased efficiency through automation
• The ability to provide faster response to customer inquiries
• Having a deeper knowledge of customer needs
• Generating more marketing or cross-selling opportunities
• Better information for better management

• Reduced cost of sales and increased productivity of Sales
Representatives
• Receiving customer feedback that leads to new and improved

products or services
• Conducting more one-to-one marketing
7.5 ESSENCE OF A CRM SOLUTION
• CRM provides a common platform for customer communication
and interaction.
• The use of CRM applications can lead to improved customer
responsiveness and a comprehensive view of the entire
Customer Life Cycle.
• CRM applications provide the framework for executing the best
practices in customer-facing activities; ERP provides the
backbone, resources and operational applications to make
organizations more efficient in achieving these goals.
• CRM also acts as an enabler for e-business by developing web-
based collaborations between the company, its suppliers,
partners and customers.
• It also enables the customers to purchase products or services
on-line and receive web-based services and support.
63
7.6 CRM APPLICATIONS
The genesis of CRM is Sales Force Automation (SFA). Current CRM
applications are a convergence of functional components such as sales,
marketing, and customer service, advanced technologies &
communication channels.
Sales Applications - The thrust of sales applications is automating the
fundamental activities of sales professionals. Common applications
include:
• Calendar and scheduling
• Contact and account management

• Compensation
• Opportunity and pipeline management
• Sales forecasting
• Proposal generation and management
• Pricing
• Territory assignment and management

• Expense Reporting
Marketing Applications - Marketing Applications from the newest breed
of applications in the CRM space. These applications complement sales
applications and provide certain capabilities unique to marketing.
Common applications include
• Web-based/traditional marketing campaign planning, execution
and analysis
• Collateral generation and marketing materials management
• Prospect list generation and management
• Budgeting and forecasting
• A marketing encyclopaedia (a repository of product, pricing and
competitive information) Lead tracking, distribution and
management
Marketing applications primarily aim to empower marketing
professionals by providing a comprehensive framework for the design,
execution and evaluation of marketing campaigns and other marketing
related activities. For example, a successful marketing campaign
typically generates qualified sales leads that need to be distributed to
64
sales professionals who need to act upon them. Marketing and sales
automations are therefore complementary.
7.7. ONE-TO-ONE RELATIONSHIP MARKETING
• It is an approach that concentrates on providing services or
products to one customer at a time by identifying and then meeting
their individual needs.
• It aims to repeat this many times with each customer, such that
powerful lifelong relationships are forged. As such it differentiates
customers rather than just products
• One to One Marketing is more than a sales approach. It’s an
integrated approach that must permeate all parts of an
organisation: marketing, sales, production, service, finance, etc.
• It needs to become the guiding vision that drives the whole
company.
• It recognises that lifetime values of loyal customers who make
repeat purchases far exceed that of fickle customers who
constantly switch suppliers in search of a bargain.
• This is particularly true within financial services where the
customer acquisition costs are very high.
• At first the concept appears to be only suitable for a niche market
of rich clients, modern information technology, particularly the new
interactive mediums, provide an opportunity to bring personalised
and customised products to the mass market yet at a mass-
produced price. This is called Mass Customisation.
• It does require new thinking that breaks away from the traditional
concepts of mass marketing and mass production.
For example, in the general insurance industry acquisition costs can be
equal to 2 to 3 year’s profit, yet many customers are switching suppliers
every year! Further, with the introduction of Data Mining, many
companies are now realising that just 20% of their customers provide
80% of the profits. Worst, many of the remaining 80% of customers are
lost-makers.
• One to One Marketing is different to mass marketing because it
differentiates the customers & not products, and because it selects
customers based on their lifetime value.
• It is true that the provision of such products and services has in
today’s mass markets become an expensive niche, and many
customers feel “forced” to take the standard offerings. No wonder
they become dissatisfied and switch when a new bargain is
65
advertised. And in situations where there is no mass market. (e.g.
solicitors)
• Customers are becoming resentful for the apparent poor value for
money.
• We have powerful and plentiful IT system, allowing us to create a
whole new paradigm. It’s called Mass Customisation.
Mass Customisation
Mass Customisation harnesses these new technologies to bring
customised and personalised products and services to customers at a
mass production price.
• The uniqueness and profitability of customised products and
services, together with the economies of scale and mass market
penetration, stemming from the use of mass production
techniques.
• It introduces a new paradigm whereby companies seek to
fragment the market through economies of scope.
• Customers become integral with the product and service design
processes, with more sophisticate customers undertaking
simulations to answer “what-if” questions.
• Products and services are assembled from components to build
unique products for individual needs.
• Mass Customisation, like One to One Marketing requires new
organisational thinking.
• True customer service leading to strong relationships and
enhanced lifetime value. Every employee becomes a marketer
Mass Customisation is a componentised approach for assembling
individual products and services to meet the unique needs of our
customers but at the same cost as a mass-produced product. Using
modern information technology, customers, agents, distributors or
employees can assemble these products and services to meet our
customer’s specific requirements.
•
When One to One Marketing is combined with Mass
Customisation we have a very powerful synergy that provides a
true competitive advantage.
• Relationship marketing as practised in various sectors along with
some effective tips on using our customer’s database
Why Relationship Marketing at All?
When offerings from various companies are nearly at par in terms of
quality and performance, it is the personal equation between a buyer
and seller, which often tilts the scale in favour of the seller. Here are
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some examples of companies who have implemented relationship
marketing and have benefited from it.
1. Personal Touch
In 1985, the FMCG giant Nestle had only 20% of the baby food market
in France. They regularly mailed information on childcare to young
mothers. Qualified dieticians were employed to help mothers chalk out a
nutrition schedule for their children. By 1992, its share shot up by 40%.
2. Cementing Bonds
Birla Super Shoppes seeks to build relationships by offering free
consultancy to cement buyers such as masons, civil engineers and
contractors. Each Super Shoppe has a civil engineer and a taskforce to
assist him. Travelling to the customer’s site to give a demonstration or
solve their problem helped them to build relationships with the
customers.
3. Banking on Relationships
ANZ identified a gap between what customers expected (in the form of
advisory services and investment banking) from the bank and the
perceived delivery. It is for this crème de la crème, that the Captain
Grindlays Club was formed. The bank pushes the whole customer-bank
relationship beyond the ordinary functional spheres of banking, to
something more one–to–one and exclusive.
How to use our Customer Database
For Customers
• Send timely reminders of needed services: doctor’s/dentist’s
appointments, oil change/tune up, “our letterheads/memo pads
will be depleted soon. Order now with the attached reply form”.
• Send customer’s kids birthday cards, if you can get that on our
database.
• Invite customers/prospects to a product demonstration or
educational seminar. (Free to customers, small fee for
prospects.)
• Using careful segmentation, send:
✓ Information about price changes
✓ Information about product changes; Product samples to
customers.
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✓ Newsletter (especially as part of a Frequent Buyer
program).
For Business-to-Business
• Case studies of successful implementation of our product. IT
companies include case studies of solutions developed for their
clients in their sales brochures.
• Send press releases on new product announcements to
customer/prospect segments. Include information for requesting
product brochures.
• Reprints of our ad campaign with note. (In case you missed our
ads when they ran in ... xyz ... and ... abc ..., we’re sure you’d
want to see them.)
• Contests (customers only). Integrate with sales incentive contest
for sales.
• Send them a copy of the annual report.
One-to-One Marketing - The Technologies

• One to One Marketing exploits the new technologies, especially
the interactive ones: Internet, interactive TV, web-TV, kiosks, fax,
e-mail, voice mail, personal data assist, mobile phones, smart
phones, etc.,
• Exploiting these technologies requires a range of appropriate
support technologies, such as: customer information system,
rules based systems, e-commerce systems, data mining tools,
component based IT systems, enterprise repositories, object
technology systems to mention a few.
• Interactive mediums, together with the support technologies
outlined, can herald a new era of Mass Customisation.
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One-to-One Marketing - More than Technology
• One to One Marketing requires a different approach.
• There is a need to manage our customers, not just our
products.
• You must take products to customers, not expect customers
to come products.
• Protecting privacy is important. Threatening privacy destroys
trust and discourages collaboration.
• It requires that all parts of the organisation that deals with or
support customer services, to be truly customer focused,
treating each as an individual.
• To be successful with One to One Marketing you may well
need to undertake a change management programme.
Benefits of One-to-One Marketing
• Higher Profits
• One to One Marketing delivers economies of scope. Not

economies of scale.
• It initially concentrates on those 20% or even 10% of customers
who are our most profitable.
• By providing tailored products to meet particular needs, you
make comparative shopping difficult, and you shift the focus from
price to benefits.
• It aims for lifetime share of customer, not a share in an often
static and crowded market.
• By developing Mass Customisation capabilities, you can then
extend the service to more customers. You then gain an ever-
increasing market share without the need to match the lowest
price mass market supplier.
• The cost of keeping profitable customers far outweighs the
acquisition cost of new customers.
• With an intimate knowledge of individual customers, products

and services can be more accurately targeted (right specification
at the right time in the right way).
One-to-One Marketing - The Implications.
• Promotion - One to One promotion needs to highlight individual
possibilities and unique benefits. Timeliness of delivery is important.
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• Design - Customer needs will be better met where products and
services can be personalised and customised easily. The marketing
department needs to take a component based approach and
create identifiable basic building blocks.
• Rules will define the possible combinations and limits. Such
rules will usually be held in a rules repository, along with the other
business that defines policies, processes, etc. Processes and IT
systems will need to support this approach, not only in product
development, but through marketing, sales, and servicing.
• Production - Production systems needs to assemble the basic
blocks according to the rules. This may be down by our sales staff,
agents, distributors or our customers themselves (Mass
Customisation).
• Servicing - Profiles of individual customer products as well as
profiles of the individual customers, need to be available to support
staff throughout the life of the customer.
• Feedback - Feedback during the any part of the marketing,
purchase or support cycles needs to be encouraged and captured.
Such data needs to be analysed, communicated, and acted on in a
timely fashion, perhaps within minutes. Information provided by
customers must be used sensitively and be kept secure.
• Organisation - All staff will be needed to be well trained and
motivated to meet individual needs. The management style and
organisational culture may well need changing. Staff need to be
supported with good Information Technology A shared customer
information system, data mining tools, interactive technologies,
flexible component-based systems object technology systems, and
rules based systems are key.
7.8. CROSS AND UP SELLING
Cross selling and up selling are two of the best ways to develop our
customer base and increase our average customer value.
• Cross selling is the strategy of selling our customers a wider
range of our products and services.
• This can be done by identifying which products to target at which
consumers based on their past purchases and behavior. E.g. if
they have a bank account would you try to sell them a mortgage,
a pension or an ISA? To understand what products our customer
may be in the market for you need to understand more about
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them. If they are older, they may not be interested in a mortgage
or a pension, but they may be interested in savings products. To
do this you need to understand:
• Demographics such as age, income, family composition
• Product history
• Responses to previous campaigns/offers
All this information can then be combined to build a propensity model for
our different products to be used in campaign selections.
• Up selling means driving more value out of the customer by
making sure they make use of our service more often or upgrade
to a higher value product.
• This would be done using the same techniques as for cross
selling. This tactical activity can be a key tool in retention by
deepening the customer relationship as they have an increasing
number of products from you.
7.8.1 How to Up-Sell, Cross-Sell and Optimize
There are five ways to do this -
• Offering a greater quantity for a slightly higher price - For
example, giving a three-for-the-price-of-two discount or a ‘large’
portion for a ‘medium’ price, such as a case of wine for the price
of 10 bottles.
• Offering complementary products - For example, promoting
accessories for electrical goods, such as batteries, tapes and
carry-cases.
• Offering related products - For example, offering a discount on
boots when a customer buys a winter coat, or swimwear with
summer clothes.
• Offering a premium product - For example, ensuring that
customers can’t visit our site without being aware of the existence
(and the advantages) of our highest-quality, big-ticket products.
• Rewarding loyalty - For example, offering a virtual discount

voucher redeemable the next time our visitors our site, or if they
refer you to friends and family.
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Repeat Nature Business - Baby Supplies
• If a customer regularly buys a particular product, then it’s highly
likely he is also buying related or complementary products
(nappies with baby toiletries, for instance).
• If you offer a discount on these related products, you are not only
increasing our sales, but helping the customer to streamline his
shopping at the same time.
Single Purchase Businesses - Furniture, hi-fi, Computer
• Because customers will only visit for a one-off purchase, the
objective here is to ensure they spend as much as possible while
they are there.
• You could offer competitively priced product ‘bundles’ such as
the PC/printer/ scanner/software combos offered by computer
retailers.
• You could also highlight special offers on related products, such
as half-price speakers with every stereo, or you could up-sell
visitors to buy the premium products.
For example, by offering a free carrier or tie with our designer
label another important point to make is that when it comes to
major purchases, our customers need the decision-making,
specifying and purchasing system to be as stress-free and as
positive as possible.
Random or Infrequent Repeat Businesses - Books, Music, Clothes
• The objective in this case is two-fold: one - to encourage visitors
to come back again more quickly than they might otherwise have
done and two - to get people to spend more while they are there.
• Likewise, you could draw attention to the rest of our product
range or offer volume discounts such as two CDs for the price of
two
Cross-selling and up selling are established methods of improving our
sales and increasing customer loyalty.
Up selling is the practice of offering customers a product in addition to
the product they are currently purchasing.
Cross-selling refers to selling items that are related or can be integrated
with the item being sold.
Both techniques can increase sales volume and provide a valuable
service to our customers.
Many product types and Web sites lend themselves perfectly to cross-
selling.
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For example, if you sell digital cameras, it makes perfect sense to offer
related products to our customers: photo printers, paper, or other
accessories. Selling consumable items such as paper and printer
cartridges can also encourage shoppers to return to our store time and
again, creating a long-term relationship.
You can employ these techniques at either the shopping phase, or at the
checkout phase. Implementing cross- or up selling at the shopping
phase can be as simple as having links to similar products on our
products pages with some copy such as “Customers who purchased this
product also purchased…” This is a low-tech solution, but it can serve to
expose more shoppers to our products.
You can also use the “Before you Check Out” technique. This is a step
that is added into our checkout process before an order is finalized. You
can compare this to the small items that you will find at checkouts in
grocery stores. This method takes advantage of the natural instincts of a
shopper and is a very good way to cross-sell inexpensive add-ons for
our products.
LET US SUM UP
From this unit we have learnt about what the role of CRM in Marketing
is, how it would be help full for marketing managers and the need and
importance to understand - One-to-one Relationship Marketing. This unit
also helped you to understand the concepts and actives involved in
Cross Selling & up Selling
CHECK YOUR PROGRESS
1. Aggregate value of customer's base is classified as
a) shareholder value
b) base value
c) retention value
d) marketers base value
2. Record which is based on business customers past purchases, sales
price and volumes is classified as
a) customer database
b) business database
c) databases marketing
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d) company marketing
3. Whole cluster of benefits when company promises to deliver through
its market offering is called
a) customer proposition
b) product proposition
c) value proposition
d) brand proposition
4. Third step in customer's value analysis
a) assessing attributes importance
b) assessing company\s performance
c) monitoring competitors performance
d) both b and c
5. All costs customer expects to incur to buy any market offering is

called
a) total economic cost
b) total functional cost

c) total customer cost
d) total functional cost
GLOSSARY
Record Owner : A CRM user who is the owner of the record.

The record owner has the privilege to edit,
share, or update the record. A record owner
can be a sales rep, manager, or any other
user who has access to CRM.
Review Process : A process that allows the fields of a record to

be reviewed before it enters the CRM
system.
Record-level : A type of sharing that allows users with the

Sharing administrator profile in CRM to share records
with other users in the organization.
Reports : Business data presented in a tabular format.

There are both standard and custom reports.
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A report can be shared with other users in
the organization.
Reorder Level : The level at which a company makes a new

order or starts a manufacturing run to
prevent shortages, while also avoiding
overstocking
Reporting : A hierarchy structure that lets you assign

Hierarchy reporting managers for each user. This is
done to ensure that only the relevant
manager can access data.
SUGGESTED READINGS
WEB RESOURCES
1. What is CRM Marketing? - Bing video
2. Salesforce for Marketing: The Smartest CRM for 1-to-1 Customer

Journeys | Salesforce - Bing video
3. What is the difference between CRM, Email Marketing and
Marketing Automation - Bing video
1.a) 2.b) 3.c) 4.d) 5.c)
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UNIT 8
SALES FORCE AUTOMATION
STRUCTURE
Overview
Learning Objectives
8.1 Introduction
8.1.1 Sales process management
8.2 Types of sales include

8.2.1 Sales force automation
8.2.2. Implementation success vs. failure
8.3 CRM links in E-business: E-commerce and customer
relationships on the internet
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
In this unit we would make an attempt to understand the concept of
Sales force automation. Why and how it has come into existence. The
purpose of SFA in CRM is clearly explained in this unit. We would also
learn on implementation procedure and how to make it successful.
LEARNING OBJECTIVES
• explain the Sales Force automation process
• study about sales force automation implementation and its and

activities
• discuss the role and importance of E-CRM in business.
8.1 INTRODUCTION
Before getting to know about Sales force automation we need to know
first what a sales process is.
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A sales process is a systematic methodology for performing product or
service sales. The reasons for having a sales process include seller and
buyer risk management, achieving standardized customer interaction in
sales and scalable revenue generation.
Specific steps in sales processes vary from company to company but
generally include the following steps:
1. Sales lead
2. Qualified prospect
3. Need identification
4. Closing
5. Deal Transaction
From a seller’s point of view, a sales process mediates risk by stage-
gating deals based on collection of information or execution of
procedures that gate movement to the next step.
This controls seller resource expenditure on non-performing deals.
Ideally this also prevents buyers from purchasing products they don’t
need though such a benefit requires ethical intentions by the seller.
Sales processes are generally more common for companies that either
have large revenue risks that require systematic assurance of revenue
generation and/or those that choose to use a more consultative sales
approach (e.g. Saturn, IBM, and Hewlett-Packard).
8.1.1 Sales Process Management
Sales process management includes all the tasks associated with
finding sales opportunities and closing deals. This includes:
• Prospecting and qualifying leads.
• Managing contacts, opportunities, and accounts.
• Tracing the stages of deal closure and its related probabilities,
including the variable compensations directly or indirectly
related to closing deals.
• Managing and tracking communications between salespeople
and customers, such as conducting direct e-mail campaigns.
• Maintaining a database of product information in a format that’s
easy for the sales force to access, either online in the office or
offline at a customer site.
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Forms of Sale Activity
The term sales include many activities some of the various modes of
selling include:
• Direct Sales - involving face-to-face contact
a. Retail or consumer
b. Door-to-door or travelling salesman
c. Party plan
• Industrial/Professional Sales - selling from one business to
another
a. Business-to-business
• Indirect - human-mediated but with indirect contact
a. Telemarketing or telesales
b. Mail-order
• Electronic
a. Web B2B, B2C
b. EDI
• Agency-based
a. Consignment
b. Multi-level marketing
c. Sales agents (real estate, manufacturing)
8.2 TYPES OF SALES INCLUDE
1. Transaction sales
2. Consultative sales
3. Complex sales
8.2.1 Sales Force Automation
• In today’s global marketplace, organizations are fiercely
competing for customers. Increasingly, technology is playing an
ever-important role in the acquisition, service and retention of
customers.
• Within the broader landscape of strategic information
management, sales related technology is being utilized by
executives aiming to improve sales processes and achieve
higher revenues.
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• To this end, there is a growing concentration on sales
performance metrics in an attempt to meet corporate growth
targets. Sales Force Automation (SFA) systems have become
the backbone for many sales organizations.
• The origin of SFA can be traced back to the original personal
computers adopted by salespeople in the early 1980’s to perform
basic transaction processes.
• Towards the end of the decade, microcomputer applications
were introduced and were touted as increasing the ‘learning
curve’ of salespeople in helping them correctly identify customers
and execute sales methods.
• Soon after these applications were introduced salespeople saw
the introduction of mobile communication devices such as mobile
phones and pagers.
• It was not until the early 1990s that the sales force caught up
with the rest of the organization and finally started to embed IT
into its operations at the organizational, individual and team level.
SFA Definition
There is a wide spectrum of sales and IT related activities that are

considered part of SFA. Although there is no universal definition, is the
most commonly used, “sales force automation involves converting
manual sales activities to electronic processes through the use of
various combinations of hardware and software applications.”
Organisational Level
The underpinning question that organizational level analysis aims to
answer is whether there are any organizational benefits from SFA, and if
there are what are they and how are they achieved and maintained?
• First, it empirically found a positive relationship between the
functional breadths of the SFA buying committee and overall
organizational system benefits.
• Additionally, firms that had the combined intent to improve both
operational efficiency and to establish a strategic competitive
edge proved to have greater pay-off than simply those who
aimed to automate manual selling tasks.
• Management sought increased sales with less salespeople
versus the salesperson’s view to increase individual sales
through activity automation.
• This dichotomy of intended benefits can often be attributed to a
multitude of individual level analysis factors which influence SFA
adoption and utilization.
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Individual Level
• SFA research at the individual level has become a multi-
dimensional research area.
• There are many variables which can affect the maximization of
the system and sales performance.
• The highest sales producers were those that rated ‘high’ on
acceptance positive attitude towards new technology and also in
number of years of experience.
• A study investigated attitude factors that impacted levels of SFA
‘infusion.’ ‘Infusion’ was defined as “the extent to which the
salesperson fully utilizes SFA to enhance her productivity”.
• The relationship of these factors was mapped to dependent
outcomes of levels of ‘intention to use’ and ‘infusion of use’ of the
new SFA system.
• The findings indicated that salesperson attitude concerning the
new systems usefulness in their role and compatibility with
current system had a large bearing on the adoption rate. It was
found that the level of infusion positively correlated with the level
of ‘facilitating conditions’ such as training and support provided
by the organization.
• Although the idea of ‘infusion’, thus, establishing a new desired
benchmark for SFA utilization, they failed to qualify or discuss the
timing of their post-implementation data sample.
8.2.2. Implementation success vs. failure
Successful SFA implementation and adoption can depend on
several core activities.
• Recent research has further cemented the importance of training
and salesperson involvement in the decision-implementation
planning.
• Another important variable is genuine projections from
management on the system’s impact on the salesperson’s day
operations.
• The authors investigated SFA adoption through the ‘identity
theory’ framework.
• Logically, salespeople are often more autonomous than other
members of the enterprise. As such, they react differently to
organizational changes such as SFA.
• The authors investigated the relationships between individual
perceptions of technology (comprised of individual traits,
disposition toward technology, role perception and organization
characteristics) and their professional state on the person-
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technology fit and measured to the extent to which these
relationships influenced both subjective (such as job satisfaction)
and the objective (for example salesperson retention).
• Alarmingly, the results indicated that initial enthusiasm and
adoption of the system quickly decreased following the initial
training and implementation and ultimately resulted in increased
rejection of the system by the sale force.
• Their analysis highlighted the fact that if SFA is not supported in
an ongoing manner, it can lead to low levels of ‘person-
technology fit.’
This in turn can lead to wider organizational problems such as poor job
satisfaction and ultimately salesperson turnover. This critical business
problem is one that requires analysis at the organizational, individual
and team level.
Changing Nature of Sales Roles
• Several recent studies have provided a deeper drill-down on the
complexities on SFA adoption and effectiveness on experienced
users of SFA.
• Their research examined the technology stressors related to SFA
and the level of infusion of SFA into sales representatives’ daily
work.
• The research quantified that as the complexity of the sales
person’s task to integrate the new technology into the work
increased, the related effort and time they dedicated to this
activity decreased.
Lead Management
Managing leads effectively and optimizing lead flow across sales and
marketing are critical to achieving sales success. With Sales force you
can track prospect inquiries and seamlessly route qualified leads to the
right people, so sales reps get instant access to the latest prospects and
leads are never dropped or lost.
Lead Management is designed to optimize the initial pre-sales process,
freeing up our sales department to focus on the most valuable prospects
and opportunities.
For a given marketing campaign, you may wish to generate leads for
certain business partners within a target group. You use leads to qualify
the level of interest presented by these business partners, with a view to
transforming them into opportunities.
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Both customers and prospects can be considered as leads. For
example, an existing customer may be a lead for a new project you are
working on.
This scenario addresses the following business challenges:
1. Leads are wasted if they are not delivered to the right person at
the right time. Organizations struggle with the ability to get leads
to the right person in a timely manner
2. Good leads are often overlooked, while time is wasted following
up on poor leads. There is no ability to incorporate a corporate
standard in the qualification process to ensure quality and
timeliness of follow-up
3. There is no standardization of surveys, or capabilities to easily
create centralized surveys
4. Having quality leads is imperative to ensuring success with the
leads. Duplication of leads, causes wasted time and money
5. Organizations have not visibility into the lead process, and have
no ability to make adjustments to ensure success
6. No visibility into the Lead Management process, no idea how
many leads, number qualified, conversion rates, where each lead
is in the process, etc.
7. The lead process is directly tied to ROI, most companies have no
understanding of the impact of leads and lead conversions to
ROI
Benefits
a) Prevent leads from falling through the cracks
b) Improve responsiveness to prospect inquiries
c) Standardize lead qualification best practices
d) Increase lead conversion rates
e) Build distinct lead management processes for distinct groups
f) Get the most from our marketing spend
g) Optimize lead flow from capture to close
h) Set security controls to ensure teams or partners can access only
their own leads
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Ways for Improving Our Lead Management Process
• If you’re looking for ways to increase revenue, one of the
fundamental processes you need to review is our lead
management program.
• Prospect leads can originate in a variety of ways, and there is
often only a very loose structure in place to manage and react to
those leads. Our sales pipeline and our ability to hit revenue
targets all begin with good lead management.
Try these eleven strategies for improving our lead management
efforts.
1. Develop a Concrete Definition of a Lead and Make sure all
Employees understand it
• One of the biggest disconnects between sales and the rest of the
company is the definition of a lead.
• When does a prospect become a lead that a salesperson will
actually work on? It’s estimated that 90 percent of the leads that
are sent to sales staff are never acted upon. And there are
generally two primary reasons for that.
• First, the lead is routed to the wrong person and never gets
passed along to the correct person or at least not in a timely
fashion.
• Second, the lead isn’t ready to engage with a salesperson yet.
So, the salesperson will make one, maybe two contacts with that
prospect and then move on to “lower hanging fruit.”
• For better sales effectiveness, our sales staff and the rest of the
company need a more granular definition of when a prospect
becomes an actual lead that should be forwarded to sales.
2. Install an Effective Sales Opportunity Management Solution
For optimal sales effectiveness, you need to provide employees with a
tool that captures information about each and every interaction with our
prospects and customers.
3. Track the Source of the Lead
• People most often hear about our company and products and
services through ads, referrals, online banner ads or some other
form of advertising.
• You need to keep track of what actually caused these suspects
to raise their hands so you can better determine what works and
what doesn’t.
• In addition, it’s important to capture the source of each
intervening event so you can determine such things as how
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many times you need to touch a customer or what order of
touches work best.
4. Distribute our Leads Quickly
• Studies have shown that if you respond within 48 hours of a
prospect contacting you, our sales closing rate goes up
dramatically.
• Think about our own experiences. How many times have you
tried to contact a company to request information and they never
get back to you?
• By responding quickly, you set yourself apart from our
competitors. Make sure you track this rate as a key sale metric.
5. Nurture our Leads
• Depending on the products and services you offer, most people
are probably not ready to buy based on their first interaction with
you.
• Best practices call for nurturing our leads over time.
• You need to develop campaigns that allow you to touch our
prospects multiple times so you can move them through the
sales cycle until they’re ready to think about actually purchasing
from you.
6. Excite Our Sales Staff about Each Prospect
• The best salespeople focus on detailed qualifying, and so should

the rest of our staff.
• The more information you have about a prospect, the more
excited our salespeople will be about the lead. Whoever’s
collecting prospect information needs to extract additional
information from every prospect with each interaction, including
such things as “what interested you about our products” and
“why is it important to you.”
• They should also try to say the organization so our salespeople
are getting in touch with the decision-makers in each company.
7. “Tag, you’re it.”
How do you save those interesting bits of information about customers
and prospects? If you tag our records with the names of our competitors
on deals, what their objections are, whether they’ll be a referral or not,
which products they already own and so on, you can then find those
detail fast in the future.
This allows you to leverage what you learn in order to be more
successful.
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8. Treat Our Prospects like Customers
About each prospect, anyone at our company can answer a call from
that prospect and more effectively answer their questions. This will have
a significant impact on our prospects and will cause them to want to
engage with our team further.
9. Measure everything you do
But in order to measure our results, you need to decide what you want to
measure and why. Then you can capture the correct information upfront.
And once you have the right information, you can determine the return
on investment of our campaigns and focus on the campaigns and
prospects that will increase our sales pipeline.
10. Hold Regular Meetings with Our Sales Staff and Anyone else
involved in the Sales Process
You would meet with appropriate staff members on a regular basis to
review lead quality, win/loss records, and tracking CRM systems so you
can continue to improve our sales effectiveness.
11. Preload Our Database with the Right Prospects
Our customers are the first step in prospecting sales leads. Most people
think they already know who their customers are, but many companies
tell us they find a few surprises when they do an analysis of their
customer base.
So, confirm what you know about our customers. Then, once you know
who our customers are, define a few key attributes about them.
This could be external attributes such as geography, SIC code, company
size (employee count and revenue), or internal attributes such as
products, territory, credit type and contract type.
Now you can use the profile of our best customers to better define and
acquire new prospects.
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8.3 CRM LINKS IN E-BUSINESS: E-COMMERCE AND CUSTOMER
RELATIONSHIPS ON THE INTERNET
E-CRM
With E-CRM, manufacturers have the opportunity to take customer
interaction to new levels of effectiveness by integrating customer
information otherwise hoarded by customer service, marketing, and
sales departments and making it available across the organisation to
improve the overall customer experience.
• Some large companies are gaining significant competitive
advantage by using Information Technology (IT) and business to
analyze and manage their relationship with each customer.
• This trend is relevant to many larger companies. While smaller
companies tend to rely on people, rather than computers, to track
and manage their customer relationships, this trend is still
relevant to them because:
Most IT driven changes in large companies sooner or later are adapted
by progressive smaller companies, as relevant software packages suited
to the needs and budgets of SMEs are developed. Any SME planning an
overall medium-term business/IT strategy thus needs to consider
whether aspects of CRM are likely to be relevant to that strategy.
• The ability of large companies to provide a holistic approach to
customers may partly erode one of the competitive advantages
enjoyed by SMEs, namely their ability to provide a much more
personalised service than their larger competitors.
CRM is the three-letter acronym for Customer Relationship
Management. CRM packages are software tools that allow the user to
keep a record of all interactions with a customer. Typical examples of
these interactions are:
1. Complaints
2. Queries
3. Requests for Quotations
4. Instructions and so on
As the user is recording the interactions, the user can have access to all
the customer information that exists on the system. Information such as:
1. Account Balance and Transaction History;
2. Order Status;
3. Shipping Status;
And static details such as name, address, phone, email etc. The level of
information available is dependent on the level of functionality of the
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CRM tool or the degree of integration with the company ERP package.
[ERP packages process accounts, sales order processing, stock
movements, purchases and so on. The CRM tool also has functionality:
1. To assign actions (arising out of an interaction) to different users,
2. Keep a record and status on all actions that have been taken
against a particular transaction.
3. Classify an interaction as being ‘open’ until all the desired actions
have been completed
• The strength of CRM is that any employee within the company
can access the interaction record at any time to review the status
and update it.
• The customer cannot catch the employee, who has access to the
CRM tool, unaware.
• This gives the customer the ‘VIP feeling’ because the customer
feels that every employee in the company is aware of the
customer and the customer’s issues.
CRM originally evolved from the recording and fixing of complaints to the
current level where packages are now available on the Internet.
CRM systems also allow for proactive dealings with potential and
existing customer [e.g. quotes] and electronic mail-shots. Records are
kept of these interactions in the same way as complaints and other
‘reactive’ interactions are stored.
However, some of the Tier 1 CRM solutions have started to store this
type of information also. The most well-known CRM tool is provided by
Siebel Systems.
Competitive Advantage through CRM
European manufacturers have been slow in adopting customer
relationship management. Without explicit retention goals, programs for
improving customer loyalty go nowhere with subpar business
performance as a frequent result.
• With customers embracing “imported” brands like Nike, Procter &
Gamble, and Colgate- Palmolive in consumer products, Dell in
personal computers, and General Electric in appliances, many
European manufacturers’ notions about customer loyalty are
being called into question.
• The impact of competitors that excel at anticipating and serving
customer needs is beginning to be felt.
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• Despite many European manufacturers’ hesitation in adopting
CRM practices and principles to date, they now have a unique
opportunity to quickly take a lead position.
• Indeed, eCRM gives companies far greater opportunities to
improve marketing and customer satisfaction than traditional
CRM approaches.
• For example, many companies installed CRM software in their
customer call centres to create deep databases on customers,
repair and other service records, and the company’s product and
service information.
• But the primary benefits of the system were limited to the
customer service function often the call centre representatives.
Sales people typically did not gain access to the data, which they
might have used to help make a sale.
Flexible enterprise-wide E-CRM systems can create a “digital loyalty
cycle” across marketing, sales, and customer service. This provides
customers with the optimal price, quality, quantity, brand, pre-sales and
after-sales service experience. This is becoming the benchmark for
successful customer relationship management in the digital age.
• An E-CRM system or Web-based CRM system is fundamentally
less cumbersome and less expensive to implement than
traditional CRM
• Because E-CRM can be extended more easily to users
everywhere in the company through the Internet. For example,
GE estimates the cost of taking a phone order at around 5 for
simple products and as much as 80 for its higher-tech offerings.
In contrast, an order placed online costs an average 20-cent.
With GE getting 20 million phone calls a year in its appliance
business alone, the savings from Internet -based CRM
technology could become immense.
• But the value of E-CRM goes way beyond cutting cost. The
technology allows companies to capture customer feedback at
more of the “touch points” between a company and its customers
across channels and functions.
Without an ERP system to track the status of a customer’s order from
the factory to the customer’s door, a manufacturer cannot tell a customer
some of the most important things he or she wants to hear these days.
As consumers become more familiar with the Net, as bandwidth
increases and access cost falls, Internet usage will continue to soar.
Even if consumers do not buy online, the information they gain on the
Internet can still affect prices. Companies must understand that, not
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unlike the impact of imports on competition, it takes only a small
percentage of total sales to go through Internet channels to seriously
affect value propositions, prices, and profits.
• From Product and Geography Focus to Customer - Centric
Strategies
The combined impact of the Euro and the Internet has highlighted
pricing disparities across Europe and will no doubt begin to erode
them for manufactured and other internationally tradable goods and
services.
If increasingly knowledgeable customers can make price
comparisons from country to country, the only way for
manufacturers to retain price premiums and increase shareholder
value will be to offer greater value through improved customer
service and target customers with differentiated offerings.
That is, they will have to maximize the way they treat each and
every customer or segment. The entire customer interaction,
including what goes on after the sale, will become even more
important. Customer loyalty and retention are bound to become the
ultimate platform for competition.
• Customer Loyalty and Profitable Growth
Because it costs significantly more to continually attract new
customers than to retain the current ones, and because the value of
most customer relationships increases over time, companies that
increase revenue without holding onto their best customers wind up
eroding profitability and, thus, shareholder value.
When we look at the business performance of customer-centric
manufacturers, we find clear indications of the underpinnings of
success. Customer-centric manufacturers are more likely to exceed
their goals for return on assets and market share compared to non-
customer centric companies. They are also much more likely to
exceed key operational goals for inventory reduction, parts
shortages, labour costs, and organisational learning.
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• Designing The Digital Loyalty Cycle
If customer loyalty is the goal, E-CRM is the tool. Although companies
can use E-CRM to pursue benefits in any one part of the business, the
greatest benefits come from using it to link every operation in a business
that affects the customer experience.
Integrating and leveraging efforts across pricing, product quality,
marketing, sales, and customer service through the digital loyalty cycle
will increasingly become the hallmark of successful companies. By
always working from a real-time perspective.
For example, front-line staff and strategic partners can continuously
improve the way they interact with individual customers and segments.
In doing so, they not only can improve the customer experience, they
can also improve the way feedback from customers is leveraged across
product development, manufacturing, marketing, sales, and service.
When executed correctly, E-CRM implementations are designed as a
digital loyalty cycle that continuously improves to create lasting
competitive advantage. When we considering the enormous cost of
running call centres to serve customers in multiple languages and
cultures and legal environments across Europe, the Internet provides a
permanent but flexible solution to handle this diverse and costly set of
requirements. Content created in one country can be translated through
software adapted to other countries in near real-time.
In terms of technology, companies must use IT to gather, analyze and
disseminate information from customers across the enterprise.
Enterprise resource planning (ERP) systems can serve as the
foundation.
For some, a web-based approach is likely to be both faster and cheaper.
Leveraging Internet technology eases the implementation burden and
increases flexibility in designing global and regional manufacturing,
distribution, and service networks.
People are important to serving customers well. Companies must
therefore invest in people through continual learning, such as just-in-time
and cross training, to ensure that they have the skills and mindset to
achieve customer loyalty goals.
In addition, incentives should measure and reward customer
satisfaction and loyalty.
Base wages and benefits may have to be upgraded, and knowledge

systems should be supported.
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Successful companies understand that employee loyalty is crucial to
building customer loyalty.
Overcoming Real and Imagined Barriers of E-CRM
• Becoming customer-centric does not happen overnight. It
requires moving the supply chain from a “push” to a “pull” that is,
shifting from producing and distributing products according to
internal forecasts to building and delivering to meet actual
customer demand in a profitable manner.
• This shift requires thinking of the “supply chain” as the “demand
chain”.
• The challenges to manufacturers are significant but unavoidable.
The good news is that many barriers to change are more
perceived than real.
For example, the lack of a common payment system in Europe
and lack of common rules governing financial institutions. If a
company wants to set up accounts with the same bank in each
EU country, it may need as many as 900 signatures. Some say
this will prevent the Internet from facilitating the free flow of
goods and services across country lines. But EU countries have
already adopted significant legislative changes designed to
facilitate both the single European Market and business.
The one barrier to E-CRM that is very real and very big is complacency.
Manufacturers are at risk of losing the game if they cannot change their
mindset and take advantage of new tools and technologies to become
more customer oriented.
• Companies often still believe that if you make a good product,
people will buy it. If they continue to focus only on the design and
manufacture of products, they will miss important opportunities to
learn more about what their customers really want and to provide
the profitable after-sale services that customers increasingly
need and demand.
• If, on the other hand, they are willing to view their operations
more broadly by adopting E-CRM technologies to get closer to
customers, they can strengthen their customer interactions,
grow, and prosper.
• In the case of Zomax Ireland, for example, it was customers that
drove the company to embrace E-CRM and other technologies
and this is likely to be the experience of many Irish businesses
over the coming years.
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The arguments that manufacturers typically make for skimping on
customer retention practices and capabilities like E-CRM are rapidly
weakening. The challenges now are how to use technology to lead the
next revolution by leveraging the online loyalty and creating sustainable
business models.
LET US SUM UP
This unit explains us about sales force automation and various business
links associated for improving SFA through various techniques. And
also, the success and Failure of implementing SFA. ECRM and its
advantages, their development during various stages due to the rapid
growth of Internet are explained clearly using certain examples.
CHECK YOUR PROGRESS
1. SFA stands for ___.
a) Source Force Automation
b) Supply Force Automation
c) System Force Automation
d) Sales Force Automation
2. SFA ensures ___ satisfaction and helps to increase the revenues by
making better decisions
a) Developer
b) Customer
c) Employee
d) Manager
e) Which of the following features of SFA helps to integrate the financial
functionality of the back and front office of an organization?
a) Contract management
b) Opportunity management
c) Asset management
d) Data quality management
4. The entire sales pipeline is affected by ___ reporting
a) Inconsistent
b) Consistent
c) Overall
d) None of the above
5. Customer and account can be developed through a medium of ___
software in an organization.
a) Customer Force Automation
b) Account Force Automation
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c) Sales Force Automation
d) Supply Sales Force Automation
GLOSSARY
Sales Signals : A notification tool that alerts a user whenever a

customer visits the company's website, posts on
social media, or submits a ticket
Sales Order : A confirmation document sent to customers

before delivering products or services
Sales Order : Targets set for sales reps for a specific time-
period.
Sales Force : This refers to a method in which software

Automation solutions are used to streamline the execution
of a sales cycle.
Scheduled : Actions that can be triggered to occur at a

Actions specific time. Scheduled actions can be
configured for workflow rules. They include
email notifications, task assignment, field
updates, tags, web hooks, and functions
Scoring Rules : You can prioritize prospects, deals, or contacts

based on their responsiveness by assigning
scores. Scores are given for different touch
points like call, email, social responses, and
more.
Sales Inbox: : A tool for email which seamlessly integrates

with Zoho CRM to combine email and CRM
information in one place.
Software : A Software Development Kit (SDK) typically a

Development Kit set of software development tools which allows
(SDK) creation of applications for a software package,
software framework, hardware platform,
operating system, or any similar development
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platform
Sales IQ : By adding Sales IQ (live chat customer support

software) to our existing CRM account, you will
be able to extend our ability to connect with
customers.
SUGGESTED READINGS
1. CRM at the Speed of Light: Capturing and Keeping Customers in
Internet Real Time, Paul Greenberg
2. Customer Relationship Management: A Strategic Perspective, G
Shainesh, Jadish N Sheath.
3. Developing Knowledge-Based Client Relationships: The Future
of Professional Services (Knowledge Reader), Ross Dawson
WEB RESOURCES
1. Improved team productivity with sales force automation -
YouTube
2. Salesforce Pardot: B2B Marketing on the World's #1 CRM |

Salesforce - Bing video
3. Pivotal Sales Force Automation Solution - Eclipse - Bing video
1. d) 2.b) 3.a) 4.a) 5.c)
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BLOCK 3
CRM PLANNING AND

IMPLEMENTATION
UNIT 9 : CRM PLANNING AND IMPLEMENTATION

PROCESS
UNIT 10 : TYPES AND TOOLS OF CRM
UNIT 11 : CRM IMPLEMENTATION ROAD MAP
UNIT 12 : CUSTOMER CENTRIC MARKETING
95
UNIT 9
CRM PLANNING AND IMPLEMENTATION

PROCESS
STRUCTURE
Overview
Learning objectives
9.1 Introduction
9.1.1 Developing CRM strategy
9.1.2 Building CRM project foundation

9.2 Identifying business processes
9.3 Creating proposals
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
A Customer Relationship Management strategy is a plan to grow sales

and improve customer service through a combination of processes,
actions, and technology. It typically involves the sales, marketing, and
customer service functions of a business. In this unit we will be going
through the CRM planning and implementation process in various
methods
LEARNING OBJECTIVES
• evaluate five major phases in a CRM implementation
• explain number of tools and processes that can be applied in

each phase of an implementation
• discuss the Importance of project management and change
management throughout the implementation process.
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9.1 INTRODUCTION
Implementing a CRM project in an organization takes more than
purchasing and installing the CRM form a vendor. It needs setting up the
features of CRM system according to the business requirement, training
the staff, and overall shifting from conventional work culture to a new
method of handling work and customer relationships.
There are various phases a business needs to go through while
implementing CRM projects. Here in this chapter, we will discuss in brief
how to implement a CRM project.
9.1.1. Developing CRM Strategy
This is the first stage. CRM strategy is a top management level plan of
aligning employees, CRM process, and technology to achieve business
goals.
Situation Analysis
The business conducts situation analysis by considering internal and
external factors. This is nothing but SWOT (Strength, Weakness,
Opportunities, and Threats) analysis to find out how the business is
doing with the objective of examining readiness for CRM
implementation.
The managers analyze and appraise existing customer strategy, served
market segments, market position of business, marketing channels, etc.
They try to find out the answers for the questions such as −
• Which customer segments does the business serve?
• What are the marketing and customer related objectives of the
business?
• What is the business position and market share?
• What is the cost to customer management?
• How effective the present strategies of customer acquisition and
retention?
• Which products/services under what category does the business
offer?
• To what extent the customers are aware of the
products/services?
• Who are business competitors, and what are profit margins?

• Which channels we use for product distribution?
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• What is the depth of channel penetration?
• Which channels are effective? Which are becoming obsolete?
• How do channel partners find dealing with our business?
• Will the business buy, rent, or create its own CRM? What is each
option’s feasibility?
Thus, situation analysis serves as a foundation to know what the
managers want to achieve by implementing CRM.
9.1.2. Building CRM Project Foundation
Before implementing CRM projects, there are various changes required
to bring in the business environment such as −
• The working culture changes in the business organization.
• As the CRM can mean different to the people from different
domains, it is necessary for the business to start educating the
staff on CRM systems.
• The top management of business also sets up the vision on how
CRM will change the business to benefits regarding serving the
customer better and earning high revenue.
• Clear priorities are set for objectives and activities such as
enhancement of customers’ experience, cost reduction,
increasing revenue, etc.
• Goals (qualitative results) and objectives (quantitative results)
are set.
• Governance structure of experts is formed which is essential to
identify and allocate resources and responsibilities appropriately.
• The internal IT staffs of the organization is put to perform several
CRM related roles such as networking, database management,
front-end development, system integration, etc.
• The management identifies change and project management
needs in the organization, and risk factors.
9.2 IDENTIFYING BUSINESS PROCESSES
The processes are the ways by which the business gets the things done.
The processes can be of the following types −
• Vertical − Located completely within a department. For example,
customer acquisition is only marketing related process, whereas
annual revenue and tax calculation are accounts processes.
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• Horizontal − they span across various departments in the
business. For example, product manufacturing is cross functional
across R&D, finance, material management, sales, etc.
• Primary − they have major impact on the business costs or
revenue. For example, picking and delivering packages is
primary process for a courier company.
• Secondary − they have minor impact on the cost or revenue of
the business.
• Front-Office − they encounter the customers. For example,
complaint handling.
• Back-office − they are where customers are directly involved.
They are not known to the customers. For example, database
management, procurement, etc.
The business needs to anticipate which existing processes may get
affected and to what extent.
Specifying Requirements
During this step, the business identifies the stakeholders (staff, sales
team, marketing team, channel partners, IT specialists, etc.), processes,
data requirements, and technology.
Data Requirements
The business needs to create the inventory for the available data for the
CRM purposes. There are different data requirements for different CRM
types as shown –
Fig 9.1 – Types of CRM
• Which database system the business will require for CRM?
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• What is the number of customers the business have?
• How can much the number of customers increase in future?
• Which fields of data are mandatory, and which are additional for
the business?
The business develops a customer related database to store the
customer information, such as contact data, contact history, transaction
history, communication preferences, opportunities with customer, and so
on.
Technology Requirements
It includes selection the required CRM technology from a wide choice.

• How to access the CRM software: from business server (On-
Premises) or from vendor’s server (Hosted or Online) via
internet?
• Which CRM applications can fulfil the business vision and
objectives among a myriad number of applications under CRM?
• What hardware is required for sales, services, and marketing

staff?
• What is the required hardware platform on which the database
will reside and function?
On Premise CRM Hosted or Online CRM
It is installed at user premises. A It requires payment of fees on

CRM purchasing business bears the annual basis. For example, USD
cost of infrastructure, customization, 50 per user, per month.
and implementation.
Costs are variable. Costs are fixed and known.
It imposes significant burden on staff There is less burden on business

and budgets of a business. staff with this CRM.
The vendor provides CRM upgrades Vendor performs CRM upgrades

at user premises. Upgrade costs are away from the area of using it.
additional to the initial costs. Hence no interference in the
business works.
9.3 CREATING PROPOSALS
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The business forms a well-structured Request for Proposal (RFP) in
which it lists down the idea and vision of CRM, the type of CRM
required, process, technology, costs, time frames, contracts, and staff
issues.
The proposal is descriptive enough to give idea to the vendor about the
business structure and requirements. The business then invites at least
three and at the most six technology vendors by sending the proposal.
• Selecting Partner
When a business receives response from various vendors, it needs
to select a right vendor. The business management assesses the
proposal responses on the scale of importance of issues included in
the RFP. It the shortlists the technology vendors and invites them for
demonstrating their CRM products.
• Implementing the CRM Project
The business takes the following steps to −
✓ Chalk out the internal project plan.

✓ Refine the project plan with incorporating the technology vendor.
✓ Identify customization needs as no off-the-shelf CRM software
can completely satisfy the CRM needs of a business. It is done
with lead developer, database developer, front-end developer,
and vendor.
✓ Create a prototype of the customized software.
✓ Test the prototype on dummy database and users. Test it first on
the newly acquired customers rather than directly on the
customer database.
✓ Identify further customization and training requirements.
✓ Create in-house awareness on the final system installation.
✓ Performance Evaluation
As a final and continual stage for large span of time, the business
evaluates how well does the CRM perform. When a business
implements new technology, the users take a large span of time to get
acquainted and comfortable with the technology.
There are two variables the business considers −
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• Project outcomes − Whether or not the project went on as per
the plan without overrunning budgets, costs, and time. Is it
working smoothly and successfully?
• Business outcomes − The business objectives set initially have
achieved.
If the business objective was to improve the rate of customer retention,
the rate was 70% before CRM coming to aid, and it went up to 78% after
CRM implementation then the business has achieved its objective.
LET US SUM UP
In this chapter, you’ve learned about the eve major phases of a CRM
implementation, and the processes and tools that are used to ensure
that CRM projects deliver what is expected of them. The key phases are:
Develop the CRM strategy, Build the CRM project foundations, specify
needs and select partner, implement project and Evaluate performance.
CRM projects vary in scope, duration and cost, but it is always important
to be clear about what business outcomes are desired and to measure
the performance of the CRM implementation accordingly.
CHECK YOUR PROGRESS

1. Customer satisfaction with the purchase of a product is dependent
upon what?
a) The product's performance relative to the buyer's expectations
b) The product's performance relative to the price
c) The product's performance relative to the service
d) The product's performance relative to the quality
2. A loyal customer has which kind of the relationship with the
organization?
a) No relationship
b) Indifferent relationship
c) Emotional relationship
d) Transactional relationship
3. Which of the following tracks all the steps in the sales process?
a) None of the given options
b) SCM
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c) SFA
d) CRM
4. The target market for cookbooks is predominantly female and over 25
while the readership for comic books is mainly males between the ages
of 15 to 20. This is important __________ information for a publisher to
know.
a) Psychographic
b) Socioeconomic
c) Demographic
d) Geographic
5. In property development, customer relationship is based on which of
the following factors?
a) Attitudes
b) Money
c) Trust
d) Convenience
GLOSSARY
CRM Analytical : A report that gives users in-depth information

Reporting about their customers: demographics,
purchasing patterns, and comparisons over
time, are some of the areas covered in the
reports.
CSV file: : CSV is an acronym for the term “comma-

separated values.” The CSV file format is the
industry standard for exporting and importing
databases and spread sheets. When importing
contacts and other data, most CRMs use CSV
files.
Custom Fields: : Custom fields are areas that are customized to

meet the needs of our company.
Custom Links: : Custom Links are one-of-a-kind links that

enable users to access third-party apps and
URLs when using the CRM.
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SUGGESTED READINGS
1) CGI Group Inc. White Paper, Building Competitive Advantages
through Customer Relationship Management, January 2001
2) Customer Relationship Management: A Strategic Perspective - G
Shainesh, Jadish N Sheath
3) Mohammed H. Peeru and A Sagadevan, Customer Relationship
Management, Vikas Publishing House, 2004, Delhi
WEB RESOURCES
1. How to plan a successful Microsoft Dynamics 365
Implementation | ERP & CRM | D365 Implementation - Bing
video
2. How to Plan a CRM Project - CRM strategy planning advice from
a UK consultancy partner - Bing video
3. WEBINAR | 6 steps to a successful CRM Implementation -
YouTube
1.a) 2.c) 3.c) 4.c) 5.c)
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UNIT 10
TYPES AND TOOLS OF CRM

STRUCTURE
Overview
Learning objectives
10.1 Introduction
10.1.1 Introduction of Electronic Customer Relationship
Management (E- CRM)
10.2 Meaning of E-CRM
10.3 Evolutions of E-CRM
10.3.1. Current CRM and e-support environment

10.3.2. Business benefits of E-CRM
10.3.3. Direct benefits of an E-CRM system include
10.4 Working of E-CRM
10.5 Implementation of an E-CRM system
10.6 Pit falls in CRM implementation
10.7 Types of CRM programmes

Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
In the past twenty years, the focus of global markets has shifted from
sellers to customers. Today, customers are more powerful than sellers, if
we consider the driving factors of market. We have different types of
CRM according to the changes in customer portfolios, speed of business
operations, requirement of handling large data, and the need of sharing
information, resources, and efforts jointly. CRM systems are divided
based on their prominent characteristics. There are four basic types of
CRM systems − Strategic CRM, Operational CRM, Analytical CRM and
Collaborative CRM.
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LEARNING OBJECTIVES
• explain the various types of E-CRM
• discuss the implementation process of different types of CRM
• demonstrate the various type of CRM best suiting for your
business.
10.1 INTRODUCTION
Electronic customer relationship management (E-CRM) is the
application of Internet-based technologies such as emails, websites,
chat rooms, forums and other channels to achieve CRM objectives. It is
a well-structured and coordinated process of CRM that automates the
processes in marketing, sales and customer service.
An effective E-CRM increases the efficiency of the processes as well as
improves the interactions with customers and enables businesses to
customize products and services that meet the customers’ individual
needs.
10.1.1 Introduction of Electronic Customer Relationship
Management (E-CRM)
Electronic customer relationship management provides an avenue for

interactions between a business, its customers and its employees
through Web-based technologies.
• The process combines software, hardware, processes and
management’s commitments geared toward supporting
enterprise-wide CRM business strategies.
• Electronic customer relationship management is motivated by
easy Internet access through various platforms and devices such
as laptops, mobile devices, desktop PCs and TV sets.
• It is not software, however, but rather the utilization of Web-
based technologies to interact, understand and ensure customer
satisfaction.
An effective E-CRM system tracks a customer’s history through multiple
channels in real time, creates and maintains an analytical database, and
optimizes a customer’s relation in the three aspects of attraction,
expansion and maintenance.
A typical E-CRM strategy involves collecting customer information,
transaction history and product information, click stream and contents
information. It then analyzes the customer characteristics to give a
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transactional analysis consisting of the customer's profile and
transactional history, and an activity analysis consisting of exploratory
activities showing the customer's navigation, shopping cart, shopping
pattern and more.
The benefits of E-CRM include the following:
• Improved customer relations, service and support
• Matching the customers behaviour with suitable offers
• Increased customer satisfaction and loyalty
• Greater efficiency and cost reduction
• Increased business revenue

Businesses that strategize and implement an E-CRM solution are able to
align their processes around technology to effectively deliver seamless,
high-quality customer experience across all channels. Customers have
the power to help themselves through online personalized services that
are made available on demand. The Internet provides a simple and ideal
medium where customers can get information from websites, buy
products and find answers using FAQ sections, forums or chat rooms.
10.2 MEANING OF E-CRM
Customer Relationship Management (CRM) is a way to identify, acquire,

and retain customers – a business’ greatest asset. By providing the
means to manage and coordinate customer interactions, CRM helps
companies maximise the value of every customer interaction and in turn
improve corporate performance.
E-CRM, or Electronic Customer Relationship Management, is an
integrated online sales, marketing and service strategy that are used to
identify, attract and retain an organisation’s customers.
• It describes improved and increased communication between an
organisation and its clients by creating and enhancing customer
interaction through innovative technology.
• E-CRM software provides profiles and histories of each
interaction the organisation has with its customers, making it an
important tool for all small and medium businesses.
E-CRM software systems may contain a selection of the following
features:
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1. Customer management
Provides access to all customer information including enquiry status
and Correspondence
2. Knowledge management
A centralized knowledge base that handles and shares customer
Information
3. Account management
Access to customer information and history, allowing sales teams
and customer service teams to function efficiently
4. Case management
Captures enquiries, escalates priority cases and notifies
management of unresolved issues
5. Back-end integration
Blends with other systems such as billing, inventory and logistics
through relevant customer contact points such as websites and call
centres
6. Reporting and analysis
Report generation on customer behaviour and business criteria
10.3 EVOLUTIONS OF E-CRM

Customer Support – A Historical Perspective
The Customer is King. This mantra, although used for a long time, has
not been put into practice until recently. Forget the notion of royal
treatment; customers were not even treated with dignity by most
organizations.
As recently as the 1970s and 80s, the concept of customer support
meant that organizations were doing a favour by answering a few
questions for the customer on the phone – after putting them on hold for
an hour! Standing in line to buy something was common and expected.
Remember when the customers had to go to the airports to buy tickets
only because the airlines kept them there? Organizations simply lost
touch with the realization – which they existed because of these
customers.
Evolution of Customer Relationship
The 1990s brought two new concepts that challenged the prevailing
business landscape: deregulation and the Internet. These forces brought
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down the barriers of entry resulting in an environment of intense
competition.
Stores faced competition from on-line start-ups. Traditional bricks-and-
mortar banks fought for customers with online or virtual banks. Airline
tickets were increasingly purchased from the convenience of our home.
The explosion in information allowed consumers to compare features,
and prices across multiple providers. Products became commodities and
prices could not be lowered further to ensure survival.
Customer service became the only major differentiator in many cases.
Customers received what they have always deserved – respect. The
customer was now truly the king. Business customers, although always
treated with more respect than individual consumers, were more or less
ignored in the early stages of the Internet boom.
The emphasis focused on expanding the consumer base regardless of
positive cash flow, revenues, and margins. The demise of many dot-
comes brought an epiphany. Companies realized that they needed to
focus on their enterprise customers. The advent of e-CRM applications
was the first big step toward providing better support to the strategic
business customers. Although these solutions provided automated self-
service to customers, they still treated all customers the same.
Furthermore, the focus of these applications is more on improving call-
centre productivity.
Clearly, these applications add value and help many organizations
execute their CRM initiatives.
However, they are not effective in meeting the needs of an
organization’s strategic enterprise customers. Each enterprise customer
has its own needs and craves personalized support.
10.3.1. Current CRM and E-Support Environment
There are currently over 200 CRM software vendors, and the number
continues to grow. Although, there are various types of applications
included in CRM suites, as described earlier, the core application within
the CRM landscape that truly builds customer relationships is the
customer service application.
• Many of these applications were initially focused on providing an
environment to improve the productivity of call-centres.
• In addition, some of these applications integrated message
queuing functionality to provide a common environment for all
channels. So, whether the customer was trying to reach the call-
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centre by making a call, via e-mail, by fax, or through the Web
site, their query is prioritized and channelled through the same
mechanism.
• Most customer service applications now provide Web-based
self-service features for companies to offer their customers.
Enterprise customers demand personalized support in order to access
their information quickly and easily. In the era of information-glut, they
want specific and relevant information. Companies are trying to manage
relationships with their customers, partners, and suppliers in a
personalized and automated manner. True personalization is not easy
as each customer has its own needs and requirements. The issue is
further complicated by the fact that
Business Benefits of E-CRM
Implementation of an E-CRM system enables an organisation to
streamline processes and provide sales, marketing and service
personnel with better, more complete customer information. The result is
that E-CRM allows organisations to build more profitable customer
relationships and decrease operating costs.
Direct benefits of an E-CRM System Include

a) Service level improvements
Using an integrated database to deliver consistent and improved
customer responses
b) Revenue growth
Decreasing costs by focusing on retaining customers and using
interactive service tools to sell additional products
c) Productivity
Consistent sales and service procedures to create efficient work
processes
d) Customer satisfaction
Automatic customer tracking and detection will ensure enquiries
are met and issues are managed. This will improve the
customer’s overall experience in dealing with the organisation.
e) Automation
E-CRM software helps automate campaigns including:
i. Telemarketing
ii. Telesales
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iii. Direct mail
iv. Lead tracking and response
v. Opportunity management
vi. Quotes and order configuration
Across every sector and industry, effective E-CRM is a strategic
imperative for the corporate growth and its survival
a) Sales organisations can shorten the sales cycle and increase
key sales-performance metrics such as revenue per sales
representative, average order size and revenue per customer.
b) Marketing organisations can increase campaign response

rates and marketing driven revenue while simultaneously
decreasing lead generation and customer acquisition costs.
c) Customer service organisations can increase service agent
productivity and customer retention while decreasing service
costs, response times and request-resolution times.
10.4 WORKING OF E-CRM

In today’s world, customers interact with an organisation via multiple
communication channels—the World Wide Web, call centres, field
salespeople, dealers and partner networks. Many organisations also
have multiple lines of business that interact with the same customers.
E-CRM systems enable customers to do business with the organisation
the way the customer wants – any time, via any channel, in any
language or currency—and to make customers feel that they are dealing
with a single, unified organisation that recognises them every step of the
way.
The E-CRM system does this by creating a central repository for
customer records and providing a portal on each employee’s computer
system allowing access to customer information by any member of the
organisation at any time. Through this system, E-CRM gives you the
ability to know more about customers, products and performance results
using real time information across our business.
10.5 IMPLEMENTATION OF AN E-CRM SYSTEM
When approaching the development and implementation of E-CRM
there are important considerations to keep in mind:
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a) Define customer relationships
Generate a list of key aspects of our customer relationships and
the importance of these relationships to our business.
b) Develop a plan
Create a broad Relationship Management program that can be
customized to smaller customer segments. A suitable software
solution will help deliver this goal.
c) Focus on customers
The focus should be on the customer, not the technology. Any
technology should have specific benefits in making customers’
lives easier by improving support, lowering their administrative
costs, or giving them reasons to shift more business to our
company.
d) Save money
Focus on aspects of business that can contribute to the bottom
line. Whether it is through cutting costs or increasing revenue,
every capability you implement should have a direct measurable
impact on the bottom line.
e) Service and support

By tracking and measuring the dimensions of the relationship,
organisations can identify their strengths and weaknesses in the
relationship management program and continually fine tune it
based on going feedback from customers.
10.5.1 Reasons Why CRM Implementation Can Fail
• Not able to communicate properly: The implementation of the
CRM software requires permission from the top management in
any company, if there is a problem with the communication
between the staff members and the management then it creates
additional problems to the software implementation. Hence there
must be proper communication between the employees and the
management for a smooth implementation.
• Lack of wide use of the software throughout the
organization: Less use of CRM within the organization might
create a problem! The CRM installation is expensive, when it is
not made use of properly by every department in the company
then there might be a lot of disadvantages, in order to overcome
this situation the importance of CRM software must be told to
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every department and must be made use of by each and every
department in the company.
• Weak technology integration: There are multiple departments
in a company, every department has its own set of rules to follow
and accomplish. Using CRM it becomes easier to integrate these
departments and have an ease of use of CRM software. Hence
work becomes easier when the teams decide to integrate the
technology.
10.7 TYPES OF CRM PROGRAMMES
In the past twenty years, the focus of global markets has shifted from
sellers to customers. Today, customers are more powerful than sellers, if
we consider the driving factors of market. We have different types of
CRM according to the changes in customer portfolios, speed of business
operations, requirement of handling large data, and the need of sharing
information, resources, and efforts jointly.
CRM systems are divided based on their prominent characteristics.

There are four basic types of CRM systems –
• Strategic CRM
• Operational CRM
• Analytical CRM
• Collaborative CRM
The following table lists the types of CRM and their characteristic
features −
Type Characteristics
Strategic CRM Customer-centric, based on acquiring and

maintaining profitable customers.
Operational CRM Based on customer-oriented processes such as

selling, marketing, and customer service.
Analytical CRM Based on the intelligent mining of the customer

data and using it tactically for future strategies.
Collaborative CRM Based on application of technology across

organization boundaries with a view to optimize
the organization and customers.
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1. Strategic CRM
Strategic CRM is a type of CRM in which the business puts the
customers first. It collects, segregates, and applies information about
customers and market trends to come up with better value proposition
for the customer.
The business considers the customers’ voice important for its survival. In
contrast to Product-Centric CRM (where the business assumes
customer requirements and focuses on developing the product that may
sometimes lead to over-engineering), here the business constantly
keeps learning about the customer requirements and adapting to them.
2. Operational CRM
Operational CRM is oriented towards customer-centric business
processes such as marketing, selling, and services. It includes the
following automations: Sales Force Automation, Marketing Automation,
and Service Automation.
Sales force is the best suitable CRM for large established businesses
and Zoho is the best CRM for growing or small-scale businesses.
Fig 10.1 Operational CRM

3. Sales Force Automation
SFA is the application of technology to manage selling activities. It
standardizes a sales cycle and common terminology for sales issues
among all the sales employees of a business. It includes the following
modules −
• Product Configuration − It enables salespersons or customers
themselves to automatically design the product and decide the
price for a customized product. It is based on if-then-else
structure.
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• Quotation and Proposal Management − The salesperson can
generate a quotation of the product prices and proposal for the
customer by entering details such as customer name, delivery
requirements, product code, number of pieces, etc.
• Accounts Management − It manages inward entries, credit and
debit amounts for various transactions, and stores transaction
details as records.
• Lead Management − It lets the users qualify leads and assigns
them to appropriate salespersons.
• Contact Management − It is enabled with the features such as
customers’ contact details, salespersons’ calendar, and
automatic dialling numbers. These all are stored in the form of
computerized records. Using this application, a user can
communicate effectively with the customers.
• Opportunity Management − It lets the users identify and follow
leads from lead status to closure and beyond closure.
Marketing Automation
Marketing automation involves market segmentation, campaigns
management, event-based marketing, and promotions. The campaign
modules of Marketing Automation enable the marketing force to access
customer-related data for designing, executing and evaluating targeted
offers, and communications.
Event-based (trigger) marketing is all about messaging and presenting
offers at a particular time. For example, a customer calls the customer
care number and asks about the rate of interest for credit card payment.
This event is read by CRM as the customer is comparing interest rates
and can be diverted to another business for a better deal. In such cases,
a customized offer is triggered to retain the customer.
Service Automation
Service automation involves service level management, resolving issues
or cases, and addressing inbound communication. It involves diagnosing
and solving the issues about product.
With the help of Interactive Voice Response (IVR) system, a customer
can interact with business computers by entering appropriate menu
options. Automatic call routing to the most capable employee can be
done.
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Consumer products are serviced at retail outlets at the first contact. In
case of equipment placed on field, the service expert may require
product servicing manual, spare parts manual, or any other related
support on laptop. That can be availed in service automation.
4. Analytical CRM
Analytical CRM is based on capturing, interpreting, segregating, storing,
modifying, processing, and reporting customer-related data. It also
contains internal business-wide data such as Sales Data (products,
volume, and purchasing history), Finance Data (purchase history, credit
score) and Marketing Data (response to campaign figures, customer
loyalty schemes data). Base CRM is an example of analytical CRM. It
provides detailed analytics and customized reports.
Business intelligence organizations that provide customers’
demographics and lifestyle data over a large area pay a lot of attention
to internal data to get more detail information such as, “Who are most
valuable customers?”, “Which consumers responded positively to the
last campaign and converted?”, etc.
Analytical CRM can set different selling approaches to different
customer segments. In addition, different content and styling can be
offered to different customer segments. For the customers, analytical
CRM gives customized and timely solutions to the problems. For the
business, it gives more prospects for sales, and customer acquisition
and retention.
5. Collaborative CRM
Collaborative CRM is an alignment of resources and strategies between
separate businesses for identifying, acquiring, developing, retaining, and
maintaining valuable customers. It is employed in B2B scenario, where
multiple businesses can conduct product development, market research,
and marketing jointly.
Collaborative CRM enables smooth communication and transactions
among businesses. Though traditional ways such as air mail, telephone,
and fax are used in communication, collaborative CRM employs new
communication systems such as chat rooms, web forums, Voice over
Internet Protocol (VoIP), and Electronic Data Interchange (EDI).
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Fig 10.2: Collaborative CRM
There are collaborative CRMs with in-built Partner Relationship
Management (PRM) software application which helps in managing
partner promotions. Sugar CRM is a popular collaborative CRM. It
enables expert collaboration and provides state-of-the-art social
capabilities.
CRM Software Buying Considerations
A business needs to consider the following points while selecting CRM
software −
• Business strategy and processes − It helps to automate a
customer management strategy. Hence before selecting CRM
software, a business should be clear with its strategies and
desired processes.
• Business requirements − CRM systems range from domain
specialty solutions that focus on solving a specific area such as
sales force automation, marketing automation, services
automation, partner management, etc., to complete enterprise
management solutions.
• Size of business − small businesses require tools that are easy

to learn and can handle a wide range of the most common tasks.
Large businesses opt for applications that handle more complex
tasks and thousands of users.
• Customer base − the size of the customer base a business is
required to handle.
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• Budget − A business needs to set a budget prior vendor
selection. The budget allocated for CRM varies according to the
degree of customization required.
• Context − the context in which a business is functioning, e.g.,
B2B or B2C, determines which CRM the business should go for.
• Sales channels − the sales channel a business is employing:
Direct sale, channel sale such as distributors, or Direct to
customers via retail. They matter while selecting the most
suitable CRM software.
• System integration − All the interfaces the business needs and
the CRM vendor can support without requiring too much custom
services effort.
• Strength of partners − the partners must be able to provide a
business with additional support or help to implement the CRM
successfully.
LET US SUM UP
In this unit we have understood different types of CRM and
implementation of each method. This unit also makes us understand
advantages and disadvantages of each method. The pitfalls in
implementing CRM program. E- CRM also supports businesses in the
steps of sorting out the issues related to database maintenance of our
customers.
CHECK YOUR PROGRESS
1. Operational customer relationship management supports which one of
the following functions?
a) Customer campaigns
b) Front Office
c) Data mining
d) Effective interaction
2. Which of the following processes is MOST critical to the success of
the firm?
a) Resource-allocation
b) Manufacturing and distribution
c) Payment and billing

d) Customer support/handling
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3. Which of the following refers to the “lowest” level of strategy?
a) Financial strategies
b) Marketing strategies
c) Operational strategies
d) HR strategies
4. The skill to stimulate someone to take action refers to which of the
following?
a) Skill to foresee
b) Skill to speed up response
c) Skill to listen
d) Skill to induce
5. Which of the following is the act of designing the company’s offering
and image to occupy a distinctive place in the mind of the target market?
a) Segmenting
b) Positioning
c) Targeting
d) Imaging
6. The customer relationship involves tracking the full range of
interactions with prospects and customers EXCEPT:
a) Customer service and support interaction
b) Sales interaction
c) Marketing interaction
d) Higher management activities
GLOSSARY
Lead Conversion : The lead conversion rate is calculated by

Rate: dividing the number of successfully converted
leads by the overall number of leads pursued
over a given timeframe.
Lead Generation : It refers to the actions and methods used to

locate prospective customers and their contact
details.
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Lead : The method of locating and arranging leads for
Management a business is known as lead management.
Lead Nurturing : To prevent leads from falling through the

cracks, you must nurture them into the next
stages of the sales pipeline.
Lead : The method by which a sales rep determines

Qualification whether a prospect is worth pursuing is known
as lead qualification
Lead to Cash : When a lead becomes a buyer, and the

business makes money from the transaction,
this is known as lead-to-cash
Line Item : A collection of items associated with one of our

goods or services is referred to as a line item.
SUGGESTED READINGS
1) Customer Relationship Management: A Strategic Perspective - G
2) MohammedH. PeeruandASagadevan, CustomerRelationship
Management, Vikas Publishing House, 2004, Delhi.
3) Paul Greenberge, CRM-Essential Customer Strategies for the 21st
Century, Tata McGraw Hill, 2005
4) illiam, G. Zikmund, Raymund McLeod Jr., Faye W. Gilbert, Customer
Relationships Management, Wiley, 2003.
WEB RESOURCES
1. 5 CRM Tools for Small Businesses (2018) - Bing video
2. Types of CRM and how to choose the right one for your business
- Bing video
3. Different Types of CRM Systems | Choosing the Perfect CRM for
your Business Part 1 - Bing video
CHECK OUR PROGRESS ANSWERS
1. b), 2. a) 3. c), 4. b), 5. d),
6. d)
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UNIT 11
CRM IMPLEMENTATION ROAD MAP

STRUCTURE
Overview
Learning objectives
11.1 Introduction
11.2 Building CRM project foundation

11.2.1 Identifying business processes
11.2.2 Specifying requirements
11.2.3 Technological requirements

11.2.4 Creating proposals
11.2.5 Selecting partner
11.3 Implementing the CRM project
11.4 Performance evaluation
Let us sum up
Check your progress

Glossary
Suggested readings
Check your progress answers

OVERVIEW
Implementation of CRM program will give solution which will offer
companies real benefits when it is properly aligned with the overall goals
of the company. It is important during the planning process that how this
will be done is carefully mapped out and agreed upon by key decision
makers.
LEARNING OBJECTIVES
• demonstrate the importance of implementing CRM programme

• Assess the steps involved in implementing CRM software
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• chart the road map for implementation and success of CRM
program in a organisation
11.1 INTRODUCTION
Implementing a CRM project in an organization takes more than
purchasing and installing the CRM form a vendor. It needs setting up the
features of CRM system according to the business requirement, training
the staff, and overall shifting from conventional work culture to a new
method of handling work and customer relationships.
There are various phases a business needs to go through while
implementing CRM projects. Here in this chapter, we will discuss in brief
how to implement a CRM project.
This is the first stage. CRM strategy is a top management level plan of
aligning employees, CRM process, and technology to achieve business
goals.
Situation Analysis
The business conducts situation analysis by considering internal and
external factors. This is nothing but SWOT (Strength, Weakness,
Opportunities, and Threats) analysis to find out how the business is
doing with the objective of examining readiness for CRM
implementation.
The managers analyze and appraise existing customer strategy, served
market segments, market position of business, marketing channels, etc.
They try to find out the answers for the questions such as −
• Which customer segments does the business serve?
• What are the marketing and customer related objectives of the
business?
• What is the business position and market share?
• What is the cost to customer management?
• How effective the present strategies of customer acquisition and
retention?
• Which products/services under what category does the business
offer?
• To what extent the customers are aware of the

products/services?
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• Who are business competitors, and what are profit margins?
• Which channels we use for product distribution? What is the
depth of channel penetration?
• Which channels are effective? Which are becoming obsolete?
• How do channel partners find dealing with our business?
• Will the business buy, rent, or create its own CRM? What is each
option’s feasibility?
Thus, situation analysis serves as a foundation to know what the
managers want to achieve by implementing CRM.
11.2 BUILDING CRM PROJECT FOUNDATION

Before implementing CRM projects, there are various changes required
to bring in the business environment such as −
• The working culture changes present in the business
organization.
• As the CRM can mean different to the people from different
domains, it is necessary for the business to start educating the
staff on CRM systems.
• The top management of business also sets up the vision on how
CRM will change the business to benefits regarding serving the
customer better and earning high revenue.
• Clear priorities are set for objectives and activities such as
enhancement of customers’ experience, cost reduction,
increasing revenue, etc.
• Goals (qualitative results) and objectives (quantitative results)
are set.
• Governance structure of experts is formed which is essential to
identify and allocate resources and responsibilities appropriately.
• The internal IT staffs of the organization is put to perform several
CRM related roles such as networking, database management,
front-end development, system integration, etc.
• The management identifies change and project management
needs in the organization, and risk factors.
11.2.1 Identifying Business Processes
The processes are the ways by which the business gets the things done.
The processes can be of the following types −
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• Vertical − Located completely within a department. For example,
customer acquisition is only marketing related process, whereas
annual revenue and tax calculation are accounts processes.
• Horizontal − they span across various departments in the
business. For example, product manufacturing is cross functional
across R&D, finance, material management, sales, etc.
• Primary − they have major impact on the business costs or
revenue. For example, picking and delivering packages is
primary process for a courier company.
• Secondary − they have minor impact on the cost or revenue of
the business.
• Front-Office − they encounter the customers. For example,
complaint handling.
• Back-office − they are where customers are directly involved.
They are not known to the customers. For example, database
management, procurement, etc.
The business needs to anticipate which existing processes may get
affected and to what extent.
11.2.2 Specifying Requirements

During this step, the business identifies the stakeholders (staff, sales
team, marketing team, channel partners, IT specialists, etc.), processes,
data requirements, and technology.
Data Requirements
The business needs to create the inventory for the available data for the
CRM purposes. There are different data requirements for different CRM
types as shown −
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• Which database system the business will require for CRM?
• What is the number of customers the business have?
• How can much the number of customers increase in future?
• Which fields of data are mandatory, and which are additional for
the business?
The business develops a customer related database to store the
customer information, such as contact data, contact history, transaction
history, communication preferences, opportunities with customer, and so
on.
11.2.3 Technology Requirements

It includes selection the required CRM technology from a wide choice.
• How to access the CRM software: from business server (On-
Premises) or from vendor’s server (Hosted or Online) via
internet?
• Which CRM applications can fulfil the business vision and
objectives among a myriad number of applications under CRM?
• What hardware is required for sales, services, and marketing
staff?
• What is the required hardware platform on which the database

will reside and function?
11.2.4 Creating Proposals
The business forms a well-structured Request for Proposal (RFP) in
which it lists down the idea and vision of CRM, the type of CRM
required, process, technology, costs, time frames, contracts, and staff
issues.
The proposal is descriptive enough to give idea to the vendor about the
business structure and requirements. The business then invites at least
three and at the most six technology vendors by sending the proposal.
11.2.5 Selecting Partner
When a business receives response from various vendors, it needs to
select a right vendor. The business management assesses the proposal
responses on the scale of importance of issues included in the RFP. It
the shortlists the technology vendors and invites them for demonstrating
their CRM products.
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11.3 IMPLEMENTING THE CRM PROJECT
The business takes the following steps to −
• Chalk out the internal project plan.
• Refine the project plan with incorporating the technology vendor.
• Identify customization needs as no off-the-shelf CRM software
can completely satisfy the CRM needs of a business. It is done
with lead developer, database developer, front-end developer,
and vendor.
• Create a prototype of the customized software.
• Test the prototype on dummy database and users. Test it first on

the newly acquired customers rather than directly on the
customer database.
• Identify further customization and training requirements.
• Create in-house awareness on the final system installation.
Performance Evaluation
As a final and continual stage for large span of time, the business
evaluates how well does the CRM perform. When a business
implements new technology, the users take a large span of time to get
acquainted and comfortable with the technology.
There are two variables the business considers −
• Project outcomes − Whether or not the project went on as per
the plan without overrunning budgets, costs, and time. Is it
working smoothly and successfully?
• Business outcomes − has the business objectives set initially
have achieved?
If the business objective was to improve the rate of customer retention,
the rate was 70% before CRM coming to aid.
LET US SUM UP
Implementing an E-CRM program will benefit an organization by
improving customer service and to earn more profits. Implementation of
eCRM program requires steps to be followed. In this unit we have
understood the need, importance and benefits of implementing E-CRM
program. We also have an idea of the process to be undertaken before
and after implementing CRM software.
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CHECK YOUR PROGRESS
1. Which of the following is NOT a characteristic of the Business-to-
Business arena?
a) Large markets
b) Wide geographic spread
c) Complex buyer behavior
d) Low volume of transactions
2. The phase in the selling process in which the salesperson gathers as
much information about the prospective client before the sales call is
called:
a) Prospecting
b) Targeting
c) The approach
d) Pre-approach
3. Negotiation is a give and take activity in which both parties try to

shape a deal that satisfies both of them; it reflects which one of the
following negotiations?
a) Standard negotiation
b) Co-operative negotiation
c) Collusive negotiations
d) Competitive negotiation
4. “Lead tracking, distribution and management” are functional
components of which of the following?
a) Marketing application
b) Sales application
c) Support application
d) Customer service
5. Electronic booksellers like amazon.com and barnesandnoble.com are
likely to enjoy strong sales in the future because books are a product
category that:
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a) Can be delivered digitally
a) Are highly standardized
b) Require audio or video demonstration
c) Do not require pre-purchase trial
6. Which of the following is the application of insight to create relevant
interaction or communication with consumers, customer’s channels
suppliers and partners that build value relationships?
a) Combine
b) Correlate
c) Cognize
d) Connect
GLOSSARY
Marketing : A Marketing-accepted Lead (M.A.L.) is a lead

Accepted Lead that meets specific requirements and has the
potential to become a valuable customer.
Demography, geography, and whether they are
interested in the company’s product are several
examples of requirement
Marketing : Customer communication (e.g., sending out

Automation campaigns), client and customer segmentation,
lead monitoring, ranking, and forecasting are all
marketing automation examples. In addition, the
use of software and tools to eliminate manual
processes and efforts is referred to as
marketing automation software.
Marketing Funnel : The marketing funnel is a cylinder-shaped

visual representation of the various stages
(awareness, curiosity, contemplation, intention,
assessment, and purchase) that a potential
consumer goes through from the first contact to
becoming a customer. A well-designed
marketing funnel often aids in the tracking of
potential customers and directs them as closely
as possible through each stage
Marketing : Marketing-qualified leads include reports that
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Qualified Leads are deemed worthy of a follow-up from sales by
the marketing department. M.Q.L.s are leads in
a company’s network who have expressed
intentions of buying the product and/or service
and have met a collection of marketing lead
requirements to advance further down the
purchase funnel
Marketplace : The marketplace offers a variety of CRM

framework extensions to help you improve our
systems and processes
Matrix Report : Data that is summarized and mapped out on a

grid against vertical and horizontal columns is
referred to as a matrix report.
SUGGESTED READINGS

3. S.Shanmugasundaram, Customer Relationship
Management, Prentice Hall of India Private Limited, New Delhi,
2008
WEB RESOURCES
1. End-to-end ERP Implementation - Bing video
2. 10 Steps for Successful CRM Implementation - Bing video
3. CRM Implementation: Simplify & Accelerate the Process | Close
Call - Bing video
CHECK YOUR PROGRESS ANSWERS.
1.a) 2.d) 3.b) 4.a) 5.d) 2.d)
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UNIT 12
CUSTOMER CENTRIC MARKETING

STRUCTURE
Overview
Learning objectives
12.1 Benefits of customer-centric marketing strategy
12.1.1 Identifying opportunities for growth
12.1.2 Promoting new value

12.1.3 Market share and profit
12.1.4 Reduce customer churn rate
12.1.5 Tips to grow business

12.2. Engage customers
12.2.1 Create high-quality content
12.2.2. Understanding products/services
12.3. Research on customers
12.3.1 Learn pain points and personal interests
12.3.2 Concern the customer’s needs.

12.3.3. Everything you do to start with our customers
12.3.4 Give them the best customer experience
12.4 Collect customer feedback

12.5 Ways to collect the feedback
12.5.1 Call customers directly
12.5.2 Track customer data

12.5.3 Use live chat on website
12.5.4 Engage customers through content
12.5.5 Short surveys

12.5.6 Send email to customers
12.5.7 Offer incentives
12.5.8 Usability tests

12.5.9 Create an FAQ page
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12.5.10 Customer service training
12.5.11 Create an online community
12.5.12 Use the Power of Influencer Marketing
12.5.13 Study Customer Behaviour
12.6 Ways to measure customer-centric marketing
Let us sum up
Check your progress
Glossary
Suggested Readings
Answer to Check your progress
OVERVIEW
Customer-centric marketing is a marketing approach designed to
prioritize clients and place each specific consumer at the core of
marketing structure and delivery.
Learning about our customer behaviours is a great way to build our
customer experience and deliver better services or products to our
customers.
LEARNING OBJECTIVES
• apply the tools about customer centric marketing
• identify the sources for developing business
• examine the various methods of collecting customer feedback
• discuss ROI by measuring customer centric marketing
• evaluate the developing of marketing brand
12.1 BENEFITS OF CUSTOMER-CENTRIC MARKETING STRATEGY
Building a great customer-centric strategy starts by realizing that there is
no such thing as an “average” customer since each customer has
different preferences and behaviours.
Thus, the “one-size-fits-all” marketing approach is not valid. Research
by Walter shows that 62% of companies invest resources in
understanding their customers better.
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There is a huge business value in customer-centricity. Through the
customer’s eyes, you get to find solutions to challenges that keep you up
all night.
12.1.1 Identifying opportunities for growth
Customer-centric marketing gives companies a chance to identify and
take advantage of opportunities such as unfulfilled customer needs for
growth.
For instance, through customer surveys, an electronics company might
find out that most of its customers are women and they rely on others’
help in installing equipment in their homes. This can lead to the
expansion of the company by offering home installation services.
12.1.2 Promoting new value
Through customer centricity, you are always tracking and attending to
customers to satisfy them.
Satisfied customers have a likelihood of renewing and becoming brand
ambassadors who talk good about our business to other potential clients
and this may bring new customers to our doorstep.
12.1.3 Market share and profit
Since most markets are overwhelmed with suppliers, the key to

increasing profits is maintaining and increasing the market share. You
risk losing our customers to competitors with similar products and better
shopping experiences if you don’t focus on customer needs.
While failure to execute the customer-centric strategy might save
money, the result can be a long-term decrease in market share and
lower profit.
12.1.4 Reduces customer churn rate
Many potential customers do use a brand for some time but leave and
join their business competitors. However, with a great customer-centric
marketing strategy, you know what our customers want and provide
them exactly what they want.
It will help YOU reduce the rate at which these customers leave our
business to other businesses.
12.1.5 Tips to Grow our Business
Let’s be realistic. Scaling our business is not an easy task. It requires a
lot of effort to generate leads and convert them into loyal customers.
Here are some tips to grow our business
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12.2 ENGAGE CUSTOMERS
Most of the time before becoming a customer, an individual will go
through the sales funnel. It consists of different stages that lead a
customer to their purchase.
For t hem to decide whether to purchase from you, you need to:
12.2.1 Create high-quality content
According to the research by Content Marketing Institute, most
businesses don’t have a documented content marketing strategy.
You should ensure you create a content strategy, document it, and
create high-quality content for our target market. Once you treat it as a
strategy worth investing in, our business will succeed.
Our content should be user-friendly and provide in-depth information that
engages, attracts, and educates our readers as you build trust with them
and nurture them through the sales cycle.
12.2.2 Understand our products/services
The products and services you are offering may cause great confusion
and indecisiveness to new customers when reviewing since they are not
familiar with them.
Therefore, to increase our sales velocity you need to align the

customer’s state of mind with a comprehensive understanding of what
you are selling.
For existing customers, optimizing their experience is the key to
fostering loyalty.
a. RESEARCH ON CUSTOMERS
You need to research our customers regularly to understand what they
want when they want it and how they want our product or service
delivered to them.
12.3.1 Learn pain points and personal interests
Customers have different pain points. They can be experiencing
challenges pains like trying to generate more leads and traffic.
The pains can also be increasing their brand awareness, building more
trust with customers, or increasing sales. When you know what our
customers want you are in a better position to serve them better.
• Identifying customer pain points is very crucial to you as a

marketer. The pain points help you solve our target customers’
problems and increase our brand sales and ROI.
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12.3.2 Concern the customer’s needs.
Our customers are a great source of information. It’s no secret! By
talking to them, you gain a clear understanding of our market,
competition, and referrals.
With good questions about the customers’ needs, such as “what is one
thing that no vendor does that you would like them to do?”
12.3.3. Everything you do to start with our customers
Asking customers questions helps you know more about them and their
challenges.
Customers always want to know that you care about their feelings and
our goal is to be a solution to their problems.
Our business reputation, client retention, and sales volume depending
on our customers’ empathy.
12.3.4 Give them the best customer experience
To thrive and make profits, our business relies on our customers’
experience. Our top priority is to make sure our customer gets the best
experience any time he or she patronizes our business. The most
exciting business opportunity is the customer experience.
Research by perceptions shows that 66% of customers say they will pay
more for services or products with great user experience.
12.4. COLLECT CUSTOMER FEEDBACK
The depth of information you can gather from a customer is of great help
in developing our customer-centric marketing strategy.
Here are some tools to use to collect feedback
• Type form tool had an interface that is very user-friendly to
combine surveys.
The tool is simple to use and has awesome features that help you
capture our target readers’ feedback in a great way. If you are still
interested in using the tool here is its pricing.
• Customer sure
The customer sure collects information by sending surveys through
email. Our customers fill them out and in the customer service
dashboard, you find the feedback.
It allows you to run customer satisfaction over time and if you are
interested in more than just customer feedback the extra features such
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as Helpdesk and Reviews, make it reliable. This is how the tool will cost
you if you decide to use it.
• User Echo is a software tool that offers different features
consisting of feedback, knowledge base, helpdesk, forum, and
live chat.
It also enables you to conclude what our customers like and dislike by
offering a voting system and has more than 27K users. It also has an
option where our visitors can send requests privately through a ticketing
system. And here is the cost of the software.
• Survey monkey
For one-off surveys, it is the perfect tool however it’s not appropriate for
measuring overall fulfilment or giving another chance to surveying
customers after a period of time. Check out how it works here
There are different templates you can get from the website to help you in
creating our surveys.
You also need to know how the software costs and the different features
it has. You can also integrate the tool with other software’s as you
collect data. So here is its pricing package.
• Drift is the first survey platform that aims at turning the internet
into a conversation.
It allows the marketer to make surveys an integral part of the
conversation and get to know our customers better. Here are its
products.
It’s a great site to help you create our chatbot for communication with
our clients. You can visit its site for more information.
• Hotjar is software that puts together multiple UX tools in one. For
this reason, it does not have a solid CX solution.
You can collect feedback from customers in different languages. Here
are the amazing features of the tool.
Hotjar tool helps you create tracking sessions, heat maps as well as
customize feedback pools and surveys. Below is the cost of using the
tool.
• Qualaro you can customize our user research goals and get
customer feedback.
With its advanced targeting capabilities, you can target hyper-specific
user insights virtually based on anything you want to track.
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Here is how the tool works. You can also integrate the tool with
other software’s to collect customer insights as you grow our brand.
• Check out the pricing of the tool.
Here is some more information about the pricing of Qualaroo software.
• Survicate
With survicate, you can send questionnaires by email to different
customers as well as trigger surveys at targeted locations on our
website.
This tool is also capable of dash boarding in terms of analysis. It also
gives users the privilege of choosing predefined surveys from a library
and had different great features.
You want to budget and use the tool? Here is how much you will spend.
Here are some tools you can integrate survicate tools as you improve
our brand, collect customer data and deliver the best user experience for
our clients.
• Reevoo
Reevoo is a high-end customer service feedback tool that offers
assessment at a product level other than generic reviews for web shops.
Here are the great ways the tool helps connect our brand with its
customers.
For it to show several reviews on a product level, it runs on-site product
pages. Visitors can ask an owner about a review. Visit the website and
ask for a quote on their pricing model for their services.
• Use Response
It provides you with a platform that you can use an open-sourced code
to host yourself.
You also have a chance to access live chat with the client and not only
feedback and a forum.
12.5 WAYS TO COLLECT THE FEEDBACK
Do you always hope you could get answers directly from our customers
as you develop our customer-centric marketing strategy? Customer
feedback is all about that. To collect the feedback, you need the
approach below:
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12.5.1 Call our customers directly
You can personalize our direct calls to our target customers. This
method is highly effective. It’s a great way to get information from our
customers on how to help them in their pain points.
12.5.2. Track our customer data
Tracking our customer data through web analysis makes it easy for you
to figure out those pages getting a lot of attention and those that t he
customers are turning away from.
By logging in to our Google analytics, you can find information about our
bounce rate. The tool tracks different data for our brand growth.
Using that data can help you offer better services or products for our
customers.
12.5.3 Use Live Chat on our website
Initiating a live chat for website visitors is also another great way to
get feedback from customers or potential customers.
Live chat tools are convenient for customers to use. The best places to
put live chat are our checkout page and pricing page.
You can also place the chat box on any page you want as long as it
helps you get the feedback you want. Here is an example of a live chat
on a website.
12.5.4. Engage customers through content
With the right strategy and a clear understanding of our audience, you
get customers to interact with our brand through the content on our
website. You need a great website theme to display our content
attractively as you engage our customers.
Social media gives you a great chance to work on the user experience
and respond quickly to any arising issue.
Here is an example of customer feedback on social media.
12.5.5. Short surveys
This is the easiest way to get feedback. You can catch the attention of
our clients by simply embedding the survey in a pop-up.
To achieve the most out of our online survey check out the best
survey practices.
12.5.6 send email to customers

Send our customers emails the best thing about an email survey is that
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you can get information regarding the entire shopping experience.
However, you should not send emails after every purchase as this may
annoy the clients. Survey Monkey is the best tool to send out email
surveys.
12.5.7 Offer incentives
At some point, to get feedback, you will have to persuade our
customers. You can offer a lead magnet for the sake of completing a
survey.
12.5.8 Usability tests
Usability tests provide you with honest feedback from users thus, you
making you aware of the issues with our app or our website.
This gives you a chance to launch better and less wasted resources.
Whatever feedback you get, ensure you work on it as soon as possible.
12.5.9 Create an FAQ page
To reduce the number of customer service inquiries you receive, in
addition to improving the response rate, you need to collect all the
questions clients ask and create a page answering all the questions.
Ensure you answer the frequently asked questions with an
understanding of the customers’ perspectives and feelings in mind.
12.5.10 Customer Service Training
Customer service is the key to the thriving of any business.
Training our employees and salespersons on how to handle customers
and give them the best they deserve can resonate with customers’
loyalty years to come.
12.5.11 Create an Online Community
Online communities play a big role in seeking out reviews and
recommendations from clients before making a decision.
• Share stories with them

This is the best way to break the ice with our online community.
Most people are on social media to connect, get entertained, and
gather information. For our business to grow, you need to act like
the friendly organization you are and share our stories.
• Engage them with our brand
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Engaging customers with our brand might excite them therefore,
get their friends to join. They will ask how they can help and also
talk about our brand both online and offline.
• Learn how you can serve them better
You are not as smart as our customers collectively. Giving them
control through the online community allows you to learn what
you can do to serve them better.
12.5.12 Use the Power of Influencer Marketing
You need to link our brand with influencers that our customers can trust
for you to have effective influencer marketing. It’s a great and effective
approach to our customer-centric marketing strategy. Customer trust
influencers who advocate our brand and are more likely to buy from our
brand.
12.5.13 Study Customer Behavior
Understanding our buyers’ reactions in the market makes our business
successful. Knowing our customer behavior plays a vital role in helping
you build our customer-centric marketing strategy as you grow our
brand.
• Learn how they spend on our business

Consumers have different motives when buying a product or
service. Satisfying each motive may increase the intensity of
purchase.
• Build a relationship with them to serve effectively
This involves engaging customers in all aspects and creating a
rapport that keeps customers coming back.
• Provide value upfront for our customers.
You achieve this by meeting their expectations. Give our
customers great services that will compel them to use our brand
whenever they need help to solve their challenges.
12.6 WAYS TO MEASURE OUR CUSTOMER-CENTRIC MARKETING
GROWTH
✓ Customer Lifetime Value
For any customer-centric organization, CLV is the most important. It
measures how a customer is going to spend on a product throughout his
or her relationship with it.
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✓ Churn Rate
This involves tracking the number of customers you are losing. It is a
very effective way to alert you that something is not right.
✓ Net Promoter Score
NPS predicts customer loyalty and company growth by asking the
question “what is our possibility of recommending our company to a
friend or colleague?”
Our target customers are given a score range they can recommend our
brand based on different aspects.
✓ Profit Margins/ ROI

Excellent customer service will always bring our customer back as well
as share with friends leading to a big impact on our company’s overall
return on investment.
✓ Purchase Likelihood and Loyalty
This is determined by the cognitive aspects of satisfaction. If our product
or service meets or exceeds highlighted satisfaction goals, there is a
likelihood of purchase and loyalty.
✓ Brand Advocacy
By focusing on the needs of consumers, you create strong brand

advocacy.
✓ Develop a Personal Brand
Our brand differentiates you from our competitors and creates a
lasting impression in the mind of our customers and audience.
✓ Be Consistent Across all the Marketing Channels
This ensures you are networking regularly and effectively thus growing
our professional circle. It’s a great customer-centric marketing plan to
build more trust with our customers.
You get to connect with both peers and leaders on different marketing
platforms hence the recognition of our brand. Ensure you use our
business logo across all our marketing channels.
✓ Have a Business Logo
This is a representative of our company. While logos are subject to
change, you should design one that is attractive and makes sense.
LET US SUM UP
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Although the implementation of customer-centricity may be expensive
and complex, it is the secret toward unlocking our true customer value
potential. Learning and implementing a great customer-centric marketing
plan will help you grow our brand in a short time. You will reach more
target customers, convert them and make them loyal customers to our
brand.
CHECK YOUR PROGRESS
a) Ronald S. Swift
b) Stanley A. Brown
c) Chris Todman
d) Gartner Group
2... CRM is a business philosophy that aims at maximizing ___ in the
long run
a) Organization value
b) Customer value
c) Business value
d) Software value
3. Enhance Customer Relationship Management started in ___.
a) 1980 b) 1970
c) 1990 d) 1985
4. The objective of data mining is to detect ___ relationships among data
a) Vendor b) Customer
c) Application d) Hidden
5. In ___ year PeopleSoft got expanded from their original human
resources platform
a) 1990s b) 1980s
c) 1960s d) 1970s
GLOSSARY
Natural : Natural language processing is a branch of
Language artificial intelligence (A.I.) that corresponds to
Processing computers’ potential to decipher, comprehend,
evaluate, and perceive human language (spoken
or written).
Navigation : The method of effectively moving between
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accounts in the CRM system is known as
navigation.
Objects : Accounts, addresses, leads, opportunities,
prospects, events, and tasks are all forms of data
that fall under this overarching framework.
On-premise : Instead of being hosted in the cloud, an on-
CRM: premises CRM application is built locally on the
organization’s server.
Opportunities : A future sales deal or profit-generating event is
an opportunity. Conversely, an incentive may be
for a current or new account. CRM software can
help improve opportunities by tracking,
managing, and organizing all information and
activities related to them.
SUGGESTS READINGS
1. Customer Relationship Management: A Strategic Perspective - G
2. Mohammed. PeeruandASagadevan, CustomerRelationship
Management, Vikas Publishing House, 2004, Delhi.
3. Paul Greenberge, CRM-Essential Customer Strategies for the
21st Century, Tata McGraw Hill, 2005
WEB RESOURCES
1. Capgemini's Customer Centric Digital Platform for Utilities - Bing
video
2. Customer Centric Marketing for Entrepreneurs | BabsonX on edX
- Bing video
3. How To Move From A Product-Centric to A Customer-Centric
Organisation - PART 1 - Bing video
4. Journey to Customer Centricity - YouTube
ANSWER TO CHECK YOUR ANSWERS.
1.a) 2.b) 3.c) 4.d) 5.a)
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BLOCK 4
SERVICE QUALITY
UNIT 13 : SERVICE QUALITY AND CUSTOMERS
EXPECTATIONS
UNIT 14 : SERVICE QUALITIES AND DIMENSIONS
UNIT 15 : MEASURING SERVICE QUALITY
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UNIT 13
SERVICE QUALITY AND

CUSTOMERS EXPECTATIONS
STRUCTURE
Overview
Learning objectives
13.1 Meaning of Service quality
13.1.1. Definition
13.2 Customer Expectations Management

13.3 Customer Expectation
13.3.1. Factors Influencing Customer Expectations
13.4 Customer Expectations for services
13.5 Factors That Influence Adequate Service
13.6 Perceived quality
Let us sum up
Check your progress
Glossary
Suggested Readings
Answers for check your progress
OVERVIEW:
In the present business world if any business has to survive and has to
live on for long and resist the opposition serving clients is an important
factor. Serving consumers isn't an easy process. To fulfill customer is to
look he is served with the quality satisfactory and on time. His
expectations should be met and may be beyond his expectancies if we
are capable of provider his requirements we can survive in the
marketplace. In this unit we're going to recognize the importance of
carrier excellent and what factors have an impact on the customer’s
expectation.
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LEARNING OBJECTIVES
• describe the 5 dimensions of service quality.
• use the service gap model to diagnose service deficiency...
• develop unconditional service quality.
• plan for filling service gap.
13.1 MEANING OF SERVICE QUALITY
“Services” is described with regard to the inherent characteristics of the
particular provider and “first-rate” is defined by using predominantly a
user-primarily based method
13.1.1. Definition
From the point of view of a commercial enterprise guy, carrier fine is a
success made in serving customer. It displays at each service
encounter. Customers form provider expectancies from beyond studies,
word of mouth and advertising communication. In fashionable,
customers examine perceived provider with anticipated carrier, and if the
former falls brief of the latter the clients are disappointed.
The manner of handling the quality by offerings delivered to a patron

according to his expectancies is known as carrier exceptional
management. It basically assesses how well a service has been given
on the way to enhance its excellence inside the future, discover troubles
and accurate them to growth customer delight.
Every patron has an excellent expectation of the service they need to
obtain when they go to an eating place or keep. Carrier exceptional
measures how properly a carrier is delivered, in comparison to patron
expectations. Agencies that meet or exceed expectancies are taken into
consideration to have high carrier first-class.
To preserve the purchaser, we need to make a vital plan. Considered
one of such methods to preserve clients is to serve them better. To
apprehend expectancies of customers and serve them with their
requirement. This will create positivity about our company’s business
which in turn would convert the clients into a loyal purchaser. He in flip
turns into a logo suggestion for our services and products.
There are five dimensions that customers recollect while assessing
carrier nice.
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13.2 CUSTOMER EXPECTATIONS MANAGEMENT
Client expectancies control can be very challenging certainly. Our
customers and customers will all have their personal expectancies of our
business or company and those may be distinctly numerous. Clients’
expectancies will change through the years, regularly becoming more
stressful.
These dais’s clients are more knowledgeable and more crucial than ever
before. To meet their expectations agencies and organizations want to
recognize their converting needs and needs and that they need to have
effective strategies in vicinity with a view to make sure excessive
degrees of consumer delight into the destiny. Preferably, groups must be
looking ahead to, and exceeding patron expectations earlier than they're
even expressed.
13.3 CUSTOMER EXPECTATION
Customer expectation encompasses everything that a customer expects
from a product, carrier or agency. Patron expectations are created within
the minds of customers based totally upon their character reports and
what they have learned, combined with their pre-existing enjoy and
knowledge.
Customers will have both specific and implicit expectations concerning
the products or services which they have bought. They will have overall
Performance expectancies which consist of a dynamic detail due to
expected modifications to the service or product over time. Importantly,
they will additionally have interpersonal and provider-degree
expectancies which relate without delay to the customer dating and
interplay with a business or corporation.
Having information of ways consumer expectancies are shaped and how
they trade over time gives an exceptional basis for powerful client
expectation management. It ought to be clear that developing an
expertise of our client expectancies is critical for commercial enterprise
achievement. It ought to also be clear how expectancies range. As an
example, customer expectancies in inns fluctuate significantly from
consumer expectations from a coverage provider.
Right here are a few top suggestions so one can assist us to not
handiest meet purchaser`s needs but notably exceed their client
expectancies.
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13.3.1. Factors Influencing Customer Expectations
Purchaser expectancies are stimulated through a mess of things but
there are a few key factors which can be known as important influences
on purchaser expectations.
1. Previous Customer Experience
One of the largest elements influencing client expectancies is their
previous level in with our organisation. If they are highly glad present
clients, then these units a high stage of expectation which must be
maintained. But if their preceding experience has been suboptimal then
they'll lack self-assurance in our enterprise and their expectations may
be quite low.
2. Consumer Communications
Every piece of outbound verbal exchange from our commercial
enterprise might also have prompted our purchaser expectations.
Weblog posts, tweets, web pages, emails, print advertising and
marketing, radio and television advertising all make a contribution to the

expectancies that our clients will have. Its miles important that our
communications are all honest, constant, clean and unambiguous.
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3. Reviews and Word of Mouth
The internet is a stunning studies device so we can count on our client’s
to have accomplished studies earlier than making their purchase. They
will have study reviews of our product or service, and they'll have
potentially read reviews of our commercial enterprise. They will
additionally have read what humans are saying in forums and on social
media. What they derive from those sources will impact their
expectations, so we need to be aware about what’s being said.
3. Previous Experience with Other Companies
Human beings’ experiences with different agencies and enterprises
substantially have an impact on their expectations. Irrespective of
whether other groups are within the equal area of interest as have been,
these days customers expect the same high tiers of brilliant customer
support from all organizations and enterprises.
4. Communicate Clearly and Honestly
As cited, our consumer expectations will had been inspired through what
they have got examine and possibly seen. Seeing that we've got
complete control over how we communicate with our clients we should
make certain that the records we offer is apparent, regular, entire and
sincere. Lack of readability in communications has been extensively
referred to as a giant difficulty that negatively impacts client enjoy. Here
are some fundamental recommendations:
• Make sure that the data furnished from our internet site is correct,
whole, steady and always updated.
• The language used on our internet site and in all communications
ought to be appropriate for our clients. Don’t bamboozle them
with technical jargon. Have interaction with them using the proper
language and tone of voice.
• Our social media communications need to be responsive and
well timed. What’s said desires to be correct, sincere and
effective
• Marketing and promoting ought to now not be misleading or
cheating.
• Any published documentation such as brochures, pamphlets and
flyers, must be correct, sincere and clear.
• Any video and visual messaging from our company desires to be
aligned with other communications.
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• Carrier marketers and all body of workers involved in direct client
communications must be accurately skilled and professional. The
statistics they provide should be regular with different verbal
exchange channels and their style and way have to be
appropriate.
• Let our clients recognize how lengthy they want to attend. These
days human beings count on almost instant responses, but this
isn't continually sensible, specifically when handling a worldwide
patron base. Surely informing our clients of the way length they
may want to wait can effectively set their expectations and avoid
disgruntlement.
5. Cultivate Loyalty
Fostering patron loyalty is exceptionally beneficial to all businesses. It
charges a way much less to preserve a current customer than it does to
create a brand new one. And constant clients can be fantastically
beneficial in identifying and defining changing consumer expectancies.
A few fundamental strategies that make contributions in the direction of
developing client loyalty include:
• Always personalizing communications with the aid of the usage

of their names.
• Making sure that each patron is made to experience unique.
• Always thanking them for his or her custom and their loyalty.
• Often and routinely speaking with them.
• Be aware of the information which could have an effect on
consumer expectancies.
7. Monitor Our Market and Beyond
The expectancies of our clients and clients can be greatly prompted with
the aid of what they will have skilled from other corporations in our
quarter and someplace else. If a consumer has formerly used an internet
‘chat’ facility on another internet site to get some customer service and
they acquired a response within maybe 30 seconds, then they're
probable to count on the identical from us while we enforce a web chat
tool. Further, if a customer has formerly received a quick response
through social media from an unrelated company or business then they
may be probable to anticipate an equal degree of reaction from our
social media channels.
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We need to be aware of those expectancies and preferably Endeavour
to in shape or beat them. If this isn't feasible then we need to definitely
talk with our customers to realistically set their expectancies.
7. Be Expert
Our people want to be regarded as experts in what they do and what
they provide. Each member of workforce worried in direct customer
communications, from the front-line provider employees to switchboard
operators and income professionals want to be competently skilled and
relatively confident in their abilities and their potential to manage even
the maximum traumatic patron expectancies.
8. Always Follow Up
Purchaser experience may be substantially stimulated by using whether
or not or no longer has a company followed up after an initial contact.
For example, if a patron has contacted a provider desk, via cell phone or
maybe thru an online chat facility, and a decision to their difficulty
became supplied, this have to be accompanied up, probable thru
electronic mail, to affirm the hints furnished and that the solution became
a success.
Further, after a purchase it’s exact exercise to touch customers to verify

that they're happy. Easy, easy-to-complete consumer satisfaction
surveys are a top-notch way to comply with and derive some probably
valuable customer remarks.
9. Discover and Exceed
With the aim of organising a rapport with our clients we’re in an
incredible function to find out their anticipated expectations.
• What are they looking forward to inside the future?
• What do they expect of the goods or services furnished from our
enterprise
• What they are experiencing someplace else this is influencing
what they anticipate from us armed with this notably treasured
perception our commercial enterprise may be able to now not
simplest meet their expectancies but to significantly exceed
them.
13.4 CUSTOMER EXPECTATIONS FOR SERVICES
• Beliefs approximately carrier delivery
• Function requirements or reference points against which
performance is judged. •customers compare their perceptions of
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overall performance with these reference factors whilst
evaluating carrier nice.
• Thorough know-how approximately consumer expectancies is
vital to offerings marketers.
Expected Service: ranges of expectations possible levels of customer
Expectation perfect expectations or desires Normative “ought to”
expectations experience based totally Norms appropriate expectancies
minimum Tolerance expectations Level of service the customer will
accept level of provider that customer hopes to obtain adequate service:
dual customer Expectation degrees favored service:
• When service falls outside this range (both very high or very low),
the carrier gets the consumer’s attention in either a fine or
negative approaches range or window in which clients do not
observe service performance
• The quarter of Tolerance Zones of Tolerance for exclusive carrier
Dimensions favored service region of Tolerance good enough
provider most important elements favored service sector of
Tolerance adequate provider least important elements
• Elements that have an effect on customer expectations of

provider
• Elements that have an impact on favored provider
13.5 FACTORS THAT INFLUENCE ADEQUATE SERVICE
• how services entrepreneurs can have an impact on
• Issue possible to influence, be completely aware of aggressive
offerings, and wherein feasible and suitable, match them.
• Self-perceived service function train clients to understand their
roles and perform them higher.
• Phrase-of-mouth communications Simulate word of mouth in
advertising by using testimonials and opinion leaders.
• Identify influencers and opinion leaders for the service and listen
advertising efforts on them.
• Use incentives with present customers to encourage them to say
fine matters approximately the service.
• Past revel in Use advertising and marketing research to profile
customers’ previous enjoy with comparable offerings.
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• Situational factors Use carrier guarantees to guarantee
customers approximately provider recuperation regardless of the
situational factors that arise.
• Anticipated carrier informs customers whilst provider provision is
better than what can typically be expected in order that
predictions of future provider encounters will no longer be
inflated.
13.6 PERCEIVED QUALITY
Definition: “perceived pleasant as “the customer’s judgement about a
service’s usual excellence or superiority”.
Which means of Perceived nice can be defined as
• differs from goal or real best.
• has a higher degree abstraction in preference to a specific
characteristic of a product.
• is a global assessment that in a few instances resembles attitude:
and
• Is a judgement generally made inside a purchaser’s evoked set
Factors influencing perception of quality:
LET US SUM UP
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From this unit we’ve understood the importance of high-quality service to
clients. What exactly a customer expects and how to fulfill his
expectations. We additionally assessed the factors which influence a
customer excitation and his perception. We have also learnt different
methods and strategies used for fulfillment of his expectancies.
CHECK YOUR PROGRESS
1. _________ is an attitude formed by a long-term, overall
evaluation of a firm's performance.
a) Customer satisfaction b) Negative disconfirmation

c) Positive disconfirmation d) Service quality
2. __________ is a short-term, transaction specific measure.
a) Customer satisfaction b) Focus group interviews
c) Noncustomer research d) Service quality
3. Which of the following statements is correct?
a) Customer satisfaction leads to perceived service quality

b) Service quality leads to customer satisfaction
c) Customer satisfaction leads to increased purchasing behavior
d) The relationship between service quality and customer
satisfaction and how these two concepts relate to purchasing
behavior remains largely unexplained
4. The distance between a customer’s expectations of a service and
perception of the service actually delivered is called:
a) Service gap b) Knowledge gap
c) Standards gap d) Delivery gap
5. The firm's increased research orientation and enhanced upward
communication will assist the firm in decreasing which one of the
following gaps
a) Knowledge gap b) Standards gap
d) Delivery gap d) Communications gap
6. Understanding the customer is a critical step toward minimizing or
completely eliminating the:
a) Knowledge gap b) Standards gap
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c) Delivery gap d) Communications gap
GLOSSARY
Customer : Customer service and support automation is

Service and software that helps a business’s customer
Support service and support team organizes and
Automation automates processes. Any client concerns or
(CS&S) issues, technical difficulties, a ticket system, or a
call tracking system are all examples of CS&S.
Customer : It is the act of supporting and advocating for

service customers in their discovery, use, optimization,
and troubleshooting of a product or service.
Customer : It is the team of people who provide help when

support customers have trouble with a company’s
products or services. It’s ultimately about making
sure customers are successful in solving
whatever issues they came to our business to
help solve.
Quality : It is the process of monitoring and maintaining a

assurance predetermined customer support standard. This
process defines the appropriate level of service,
sets expectations for agents, and helps in
measuring performance.
Customer loyalty : It is when customers reward a company with

repeat business over time. Loyal buyers
consistently choose to do business with a
particular brand and often defend it against its
competitors.
SUGGESTED READING
3. S.Shanmugasundaram, Customer Relationship Management,
154
WEB RESOURCES
1. Understanding Customer Services: Customer Expectations -
YouTube
2. Customer Service - Customer Expectations - Bing video
3. Lecture 10: Customer satisfaction and service quality - Bing
video
ANSWERS FOR CHECK OUR PROGRESS
1. D) 2. a) 3. d) 4. a) 5. a)
6. a)
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UNIT 14
SERVICE QUALITIES AND DIMENSIONS

STRUCTURE
Overview
Learning objectives
14.1 Service quality meaning
14.2 Types of service quality
14.3 Dimensions of Service Quality

14.4 Gaps in service quality.
14.4.1 Closing the gaps
Let us sum up
Check our progress
Glossary
Suggested Readings
Answers for check our progress
OVERVIEW
In this unit we'd learn about one of kind sorts of provider features
existing, what are the scale for the identical we would also understand
what the gaps are present inside the present gadget and the way to
overcome those gaps to serve our clients higher.
LEARNING OBJECTIVES
• recognize what's the meaning of service exception

• explain the scale of first-class service quality
• list out the gaps in service quality
• assess the alternatives for filling the gaps.

14.1 INTRODUCTION OF SERVICE QUALITY
A client's expectation of a specific provider is decided with the aid of
elements along with pointers, private desires and beyond studies. The
expected provider and the perceived service once in a while might not
be equal, thus leaving a gap. The service fine version or the ‘gap
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version’ advanced in 1985 highlights the principal requirements for
delivering excessive carrier first-rate. It identifies 5 ‘gaps’ that reason
unsuccessful delivery. Clients normally have a tendency to evaluate the
provider they 'enjoy' with the carrier they 'expect'. If the revel in does not
healthy the expectancy, there arises a gap. Given the emphasis on
expectancies, this method to measuring carrier quality is referred to as
the expectation-disconfirmation paradigm and is the dominant model in
the purchaser behaviour and advertising literature.
A model of service excellent, based on the expectation-dies
conformation paradigm, and developed via A. Parasuraman, Valarie A.
Zeithaml and Len Berry, identifies the foremost dimensions (or additives)
of service fine and proposes a scale for measuring carrier exceptional,
known as SERVQUAL.
The model's developers at first diagnosed ten dimensions of carrier
great that have an impact on consumer's perceptions of carrier great.
However, after large testing and retesting, some of the scale was
located to be car correlated and the overall range of dimensions was
decreased to five, particularly - reliability, guarantee, tangibles, empathy
and responsiveness. These five dimensions are the concept to
symbolize the scale of carrier nice across more than a few industries
and settings. Among college students of marketing, the mnemonic,
RATER, an acronym formed from the first letter of each of the 5
dimensions, is regularly used as an aid to not forget.
Despite the dominance of the expectation-disconfirmation paradigm,
pupils have questioned its validity. Particularly scholars have mentioned
the expectancy-disconfirmation method had its roots in purchaser
research and became fundamentally involved with measuring client
satisfaction instead of provider first-class. In other phrases, questions
surround the face validity of the model and whether provider high-quality
may be conceptualized as a gap.
14.2 MEANING: PROVIDER INTEREST
1) Archaic: referring to economic residual; any financial exchange
or manufacturing technique that doesn't bring about a physical
product transfer or output; non-productive labour.
2) Cutting-edge: The application of competences (expertise, talents
and sources) by way of one entity for the gain of any other entity
in a non-coercive (jointly agreed and collectively beneficial) way.
3) Cutting-edge: value-cocreation interactions (typically with nicely
defined purchaser-company entities as events who initiate, at
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once or in a roundabout way, frontstage and again-degree sports
in anticipation of price-cocreation results).
4) Modern-Day: An economic pastime offered through one party to
another, most generally using time-based performances to result
in preferred transformation effects in recipients themselves or in
gadgets or different property for which consumers are
responsible. In trade for his or her cash, effort and time, service
customers assume to gain fee from the get admission to goods,
labour, professional abilities, facilities, networks and structures;
however, they do not commonly take possession of any of the
bodily factors involved.
14.3 DETERMINANTS OF SERVICE QUALITY
Determinant Example of evaluative criteria
Tangibility Appearance of physical facilities and personnel
Reliability Performing services right the first time
Responsiveness Willingness and ability to provide prompt

service
Communication Explaining service to customers in a language

they can understand
Credibility Trustworthiness of customer-contact personnel
Security Confidentiality of transactions
Competence Knowledge and skill of customer-contact

personnel
Courtesy Friendliness of customer-contact personnel
Understanding/ Making an effort to ascertain a customer’s

specific requirements
Knowing customers
Access Ease of contacting service
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14.4 DIMENSIONS OF SERVICE QUALITY
Each industry has special carrier high-quality requirements. In the end,
we don’t anticipate the identical sort of provider from an and retail save.
And provider satisfaction also varies through logo promise, as a 5-
celebrity lodge has very distinctive expectations than a roadside resort.
In spite of those variations, there's a popular and general manner to
degree service exceptional: SERVQUAL. Coined by Valerie Zeithaml, A.
Parasuraman, and Leonard Berry inside the book handing over quality
provider SERVQUAL is a broadly used metric based totally on a set of
five dimensions that customers have continuously ranked as the most
critical for carrier excellent in any enterprise.
The five provider pleasant dimensions are tangibility, reliability,
responsiveness, warranty, and empathy
1) Tangibility: is the advent of physical facilities, device, personnel,
and conversation substances.
Clients tend to count on easy and expert facilities and stores,

employees who look groomed and neat, and properly written and
designed substances together with menus, web sites, and signs
and symptoms. Interest in looking can imply that our company
takes purchaser consolation critically.
Whilst look isn't the maximum crucial aspect of carrier, it does
make a distinction in how customers perceive our commercial
enterprise, particularly if our brand promises a premium or
luxurious revel in.
2) Reliability: turning in on guarantees. This measurement is
continually shown to be the maximum important determinant of
perceptions of provider best. This dimension includes the
consistency in which provider guarantees are met which could
encompass retaining schedules or appointment instances,
completing tasks on time, and making sure that effects are met.
3) Responsiveness: being inclined to assist. This size emphasizes

attentiveness and promptness in handling consumer requests,
questions, court cases and issues. This consists of the duration of
time a client has to watch for assistance, solutions to questions or
interest to problems. Notion of pliability and capacity to
personalize the provider to consumer needs. Mirror client’s point
of view, no longer business.
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4) Warranty: inspiring belief and self-belief. This size is important
when clients understand services as excessive threat or sense
unsure approximately their capability to assess consequences.
The enterprise has to seek to build believe and loyalty among key
contact humans and customers.
5) Tangibles: representing the carrier bodily. Organizations need to
provide bodily representations or snap shots in their service that
clients will use to evaluate first-rate, to beautify image, provide
continuity and sign quality. Maximum groups would but, integrate
this measurement with some other dimension to create a provider
quality strategy.
6) Empathy: treating customers as individuals. Clients are specific
and unique and it's far essential that their needs are understood.
Every customer desire to sense critical and understood by way of
firms that offer a particular provider. It might be a great method for
corporations to know their customers through name and construct
relationships that replicate their personal know-how in their
necessities and alternatives. In instances where a small firm has
to compete with larger firms, the capacity to be empathetic to their
clients might also deliver the small firm a particular benefit. In
business-to-business companies, customers want companies to
understand their industries and issues.
This dimension is especially essential for small commercial enterprise
tenants in buying facilities. Because of the perception that landlords
desire large properly established anchor tenants, small commercial
enterprise tenants might also frequently experience omitted and left out.
It might then imply a lot to the small tenant if landlords might be aware of
this size.
14.5 SERVICE QUALITY GAPS
The Gap Model of Service Quality (aka the customer service gap model
or the 5 Gap model) is a framework which can help us to apprehend
consumer pride. The model indicates the 5 foremost delight gaps that
groups need to cope with while seeking to satisfy client expectancies.
The version was first proposed via A. Parasuraman, Valarie Zeithaml,
and Leonard L. Berry in 1985.
Inside the gap model of carrier fine, client satisfaction is largely a
feature of belief. If the purchaser perceives that the service meets their
expectations, then they'll be satisfied. If not, they’ll be dissatisfied. If they
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are dissatisfied, then it will likely be because of one of the five customer
service “gaps” shown under.
Gap 1: Knowledge Gap
The understanding gap is the difference between the consumer’s
expectations of the carrier and the agency’s provision of that provider.
Basically, this Gap arises because management doesn’t know exactly
what clients expect. There are a number of motives this could take
place, which includes:
• Lack of control and customer interaction.
• Lack of communication between provider employees and

management.
• Inadequate marketplace studies.
• Inadequate dating consciousness.
• Failure to concentrate to patron court cases.
Gap 2: The Policy Gap
The coverage gap is the difference between management knows of the

customer wishes and the translation of that expertise into carrier delivery
regulations and standards.
There are some of reasons why this gap can arise:

• Loss of customer support standards.
• Poorly described provider levels.
• Failure to regularly update carrier level standards.
This Gap reasons customers to be trying to find a similar service
someplace else however with better service.
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Gap 3: The Delivery Gap
The transport gap is the distinction between provider transport policies
and standards and the actual shipping of the provider.
This gap can arise for some of motives:

• Deficiencies in human resources regulations.
• Failure to match deliveries to call for.
• Employee lack of expertise of the product.
• Loss of cohesive teamwork to deliver the product or service.
Gap 4: The Communication Gap
The verbal exchange Gap is the space between what receives promised
to clients via advertising and what gets introduced.
Once more there are a number of motives why this can appear:
• Overpromising.
• Viewing external communications as separate to what’s
going on internally.
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• Insufficient communications among the operations and
advertising and marketing teams.
Verbal exchange gaps result in patron dissatisfaction. This happens due
to the fact what they get hold of isn’t what they have been promised. In
the worst case, it may cause them to turn to an opportunity dealer.
Gap 5: The Customer Gap
The patron gap is the distinction between consumer expectations and
patron perceptions. This Gap occurs because customers do now not
constantly understand what the service has completed for them, or they
misread the carrier quality.
Many companies may be completely ignorant of this gap. This gap can
manifest because of one of the different 4 gaps, or simply because the
client perceives the great of the carrier incorrectly. In a worst-case
scenario, it may cause a commercial enterprise to drop a big percentage
of their customers in a single day. Despite the fact that the corporation
concept there has been no gap, the reality was that their customers
have been just looking forward to a person to fill their perceived gap.
Important factor
In keeping with the gap version of service nice, the simplest manner to
shut the customer gap is to shut the opposite four gaps inside the
version. The volume to which one or more of these four gaps exist will
decide the quantity to which consumer perceived first-rate falls quickly in
their expectation.
There's no way for the company to at once near this gap
14.6 CLOSING THE SERVICE GAPS
Gap 1 Prescription: Learn What Customers Expect
Get a better understanding of client expectations through studies,
complaint evaluation, consumer panels, etc.
a) Growth direct interactions among managers and clients to
improve information
b) Enhance upward communiqué from touch employees to control
and decrease the range of tiers between the two
c) Flip statistics and insights into movement.
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Gap 2 Prescription: Establish the Right Service Quality Standards
1) Make certain that top management shows ongoing commitment to
high-quality as described from the consumer’s factor of view
2) Get middle control to set, talk, and toughen patron-orientated
carrier requirements for their painting’s gadgets
3) Educate managers in the skills had to lead employees to deliver
high-quality service
4) Grow to be receptive to new ways of doing commercial enterprise
that conquer barriers to handing over pleasant service
5) Standardize repetitive paintings duties to make certain

consistency and reliability via substituting tough generation for
human contact and improving paintings techniques (soft era)
6) Establish clear carrier best goals which might be tough, practical,
and explicitly designed to satisfy customer expectations
7) Make clear to employees which duties have the most important
effect on excellent and ought to acquire the best priority
8) Make certain that personnel understand and take delivery of
desires and priorities
9) Measure performance and provide ordinary remarks

10) Reward managers and employees for accomplishing nice
dreams.
Gap 3 Prescription: Ensure That Service Performance Meets
Standards
1) Clarify employee roles
2) Ensure that every one personnel understand how their jobs
contribute to client delight
3) In shape employees to jobs by means of choosing for the skills
and abilities needed to perform every process nicely
4) Provide personnel with the technical education needed to carry
out their assigned responsibilities effectively
5) Expand innovative recruitment and retention strategies to draw
the nice human beings and build loyalty
6) Beautify employee overall performance through deciding on the
most suitable and reliable era and gadget
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7) Train personnel about consumer expectations, perceptions, and
problems
8) Teach worker’s interpersonal talents, particularly for coping with
customers below stressful conditions
9) Put off role battle among employees by using concerning them
inside the manner of putting requirements
10) Train employees in priority placing and time management
11) Degree worker’s performance and tie repayment and recognition
of delivery of high-quality service
12) Expand reward systems which are significant, timely, easy,

correct, and honest
13) Empower managers and employees inside the field by means of
pushing choice-making strength down the organization: allow
them greater discretion within the strategies they use to reach
dreams
14) Make certain that employees operating at internal guide jobs

provide proper service to customer touch employees
15) Construct teamwork in order that employee’s paintings nicely
together and use group rewards as incentives
16) Treat customers as “partial employees” make clear their roles in
service shipping educate and encourage them to perform nicely of
their roles as co-producers.
Gap 4 Prescription: Ensure That Delivery Matches Promises:
1) Searching for inputs from operations personnel while new
advertising and marketing programmes are being created
2) Expand marketing that functions real employees performing their
jobs
3) Allow carrier vendors to preview classified ads before clients are
exposed to them
4) Get sales team of workers to contain operations team of workers
in face-to-face meetings with clients
5) Expand inner education, motivational, and marketing campaigns
to reinforce hyperlinks between marketing, operations, and
human useful resource departments
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6) Make certain that steady standards of carrier are introduced
across multiple locations
7) Make certain that advertising content correctly displays those
service characteristics that are maximum critical to clients of their
encounters with the employer
8) Control clients’ expectancies through permitting them to know
what is and is not possible – and the reasons why
9) Pick out and explain uncontrollable motives for shortcomings in
service performance provide customers specific stages of service
at special costs, explaining the variations between these degrees.
LET US SUM UP
From this unit we have learnt that service quality is one important
parameter to win customers. If we are able to win our customers by
quality service, we can remain in the business for long run. So, to win
customers’ trust we need to fulfill their expectations by providing proper
service. From this unit we understood what components need to be
checked to fulfill customer expectations, what the gaps are and how to
overcome these service gaps.
CHECK YOUR PROGRESS

1. As a service organization's hierarchy becomes more complex and
more levels of management are added, the firm is more likely to
experience
a) Knowledge gap b) standards gap
c) Delivery gap d) communications gap
2. The difference between management perceptions of customer
expectations and standards specifying service to be delivered is called
the
3. The firm's overemphasis on cost reduction and short-term profits will
increase the size of the:
4. Management's inability to translate what consumers want into a
written business plan will increase the size of the:
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5. The __________ occurs between the actual performance of a service
and the Standards set by management.
6. Which of the following is NOT a factor influencing the delivery gap
a) Willingness to perform b) employee-job fit
c) Role ambiguity d) overpromising
GLOSSARY
Quality : Quality assurance is the process of monitoring
assurance and maintaining a predetermined customer
support standard. This process defines the
appropriate level of service, sets expectations for
agents, and helps in measuring performance.
Quality assurance methods include email, chat,
and call monitoring; contact scoring based on the
support standard; and regular feedback to agents.
Self-service : Self-service most frequently refers to when
customers independently access information and
resolve issues rather than interact with a
company’s agent or submit a request for support.
Self-service can also benefit a company internally,
helping agents find information easily and resolve
customer issues quickly.
Self-service ratio : The self-service ratio compares the number of
help centre views with the number of tickets
submitted to agents. This measure helps
determine how readily customers are able to find
information on their own, by going to the help
centre rather than needing to submit a ticket. A
company can use a self-service ratio to
understand whether users feel empowered to
serve themselves, when new content is needed
for the knowledge base, or whether business
changes may account for customer behavior.
Service-level : A service-level agreement is the standard a
agreement company and customer set as the target for a
support team’s average ticket response and
resolution times. Service-level agreements give a
167
team a predetermined level of support to
maintain, enable tracking of performance against
goals, and help a company both deliver
predictable service and meet obligations to
customers.
Subject-matter : Subject-matter experts are support team
experts members who have deep knowledge of a
particular product, topic, or technology. These
experts serve as a valuable source of information
and support to agents and others on the team and
are often responsible for creating and updating
knowledge-based content.
Support : The support operation represents the entire team
operation responsible for providing, measuring, and
improving customer service. A support operation
may include several job functions in addition to a
general customer service agent, including
workforce management, training, quality
assurance, customer relationship management,
specialist agent, and analyst.
SUGGESTED READINGS
WEB RESOURCES
1. Service Quality Dimensions - YouTube
2. Service Quality Dimensions - YouTube
3. Five Dimensions of Service Quality - YouTube
4. CRM Strategy & Implementation - YouTube

CHECK OUR PROGRESS ANSWERS
1)a 2)b 3)b 4)b 5)c
6)d
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UNIT 15
MEASURING SERVICE QUALITY

STRUCTURE
Overview
Learning Objectives
15.1 Measuring service quality
15.1.1 Meaning of service quality

15.1.2 Benefits by measuring service
15.2 Purpose of measuring service quality
15.3 Mode of measuring service quality

15.4 Ten determinants of service quality
15.5 Effective ways to measure service quality
Let us sum up
Check our progress
Glossary
Suggested readings
Answers for check our progress
OVERVIEW
In this unit we would learn about how service quality can be measured.
Why is this important and how we can measure service quality. We
would also understand how we can reduce the gap of service by
measuring various parameters which are taken into consideration for
service quality measurement. Ultimately this is customer satisfaction
which would be the output of measuring the service quality.
LEARNING OBJECTIVES
• discuss the concept of service quality
• asses the methods of measuring service quality

• gain knowledge on the purpose of measuring service quality
• describe the different modes of measuring service quality
169
• identify the determinants of service quality
• explore effective ways to measure service quality
15.1 MEASURING SERVICE QUALITY
Measuring service quality may additionally contain both subjective and
objective methods. In both cases, its miles regularly some component of
customer pride that is being assessed. But consumer delight is an
indirect degree of provider best. Research has also indicated that the
presence of carrier first-class ends in several consequences along with
adjustments in perceived fee, consumer pride and loyalty intentions with
consumers.
Measuring the provider first-rate is important because otherwise, we
gained have a clear draw close of the service we’re presently imparting
to customers. We might also anticipate that we recognize our provider
excellent is extraordinary because our commercial enterprise is
worthwhile. Even supposing we've lots of clients, that’s not always a
terrific indicator of provider first-rate
15.1.1 Meaning of service quality
• To recap, provider first-class focuses on the wishes and
expectations of customers to enhance products and/or offerings.
• The size of provider quality measures the gap between the
customer’s stage of expectation and how properly they rated the
service(s).
• Measuring service exceptional in libraries may be each a
selected challenge in addition to a chronic system to beautify and
improve services.
15.1.2 Benefits by measuring service quality
The advantages of measuring service exceptional consist of:
• We will be able to become aware of where offerings want
improving within the view of our users.
• It will permit us to offer services which are extra intently aligned
with the expectations of our users.
• it's going to allow us to evaluate our provider pleasant with peer
institutions so one can develop benchmarks and recognize nice
exercise.
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15.2 PURPOSE OF MEASURING SERVICE QUALITY
• We first need to determine if we need to degree a selected aspect
of our library and records service (e.g. the supply of records
capabilities schooling) or the service as an entire
• If we're measuring the Gap provider, we are able to get indicators
from each element of the provider: e.g. Inter-library loans,
literature searching, enquiry managing, education and many
others.
15.3 MODE OF MEASURING SERVICE QUALITY

Generally, organizations use a mixture of qualitative and quantitative
methods:
• Qualitative techniques: interviews focus businesses, remark

(along with mystery buying!).
• Quantitative techniques: surveys (questionnaires, purchaser
comments cards), records (routine statistics collection).
• There is also specific equipment that may be used to degree
carrier quality in corporations.
As an instance:
• ISO requirements
• SERVQUAL
• Liquid+ (specifically for use in library and information offerings)

• RATER scale.
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15.4 TEN DETERMINANTS OF SERVICE QUALITY
1) Get right of entry to - the ease and comfort of gaining access to
the provider(s).
2) Communication - keeping our customers informed, taking note of
our users.
3) Competence - having the abilities and know-how to provide the
service(s).
4) Courtesy - politeness, appreciate consideration, and friendliness
of staff in any respect levels.
5) Credibility - trustworthiness, reputation and image.

6) Reliability - imparting consistent, accurate and reliable
provider(s); handing over the service that was promised.
7) Responsiveness - being inclined and ready to offer carrier(s)
while wished.
8) Safety - physical safety; economic protection; confidentiality.
9) Tangibles - the bodily components of the service which includes

gadget, centers, resources.
10) Understanding the consumer - understanding individual client
needs.
If a consumer is glad about the provider’s satisfactory this would lead to
increase in sales and photo of the product/enterprise. Consequently,
carrier exceptional and consumer delight are to interwoven concepts
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• Customer Satisfaction: All customers want to be satisfied.
Customer loyalty is only due to the lack of a better alternative
Giving customers some extra value will delight them by
exceeding their expectations and insure their return
• Moments of Truth each customer contact is called a moment
of truth.
We have the ability to either satisfy or dissatisfy them when we
contact them. A service recovery is satisfying a previously
dissatisfied customer and making them a loyal customer.
• Making Customers into Champions: easy Walking wounded
Champions Could complain but don’t; Active in providing not
happy but repurchase British Airways with information on quality
of its services; loyal Remain Loyal Defect Missing in action
Detractors Defected; Defected; noncomplaining vocally critical
not easy don’t complain Propensity to contact British Airways
How easy customers feel it is to contact British Airways
• Expressing Dissatisfaction: Public Action Seek redress directly

from the firm Action Take legal action Dissatisfaction occurs
Complaint to business, private, or governmental agencies Private
Action Stop buying the product or boycott the seller No Action
Warn friends about the product and /or seller.
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15.5 EFFECTIVE WAYS TO MEASURE SERVICE QUALITY
Measuring carrier nice is critical to business increase. However, at the
identical time, it's also one of the CX metrics that can't be measured
straight forwardly. Why? Because we will measure numbers, responses,
products sold, and even complaints, but how do us measure quality.
Given under are the six most practical strategies to measure carrier
exceptional effortlessly and efficiently.
1. Servqual
SERVQUAL is a service excellent framework that was advanced in
1977. On account of that then, it is considered because the maximum
holistic framework for measuring provider satisfactory. Firstly, the
framework used ten factors to measure carrier pleasant, particularly –
security, communication, courtesy, and get entry to, tangibles,
understanding the patron, responsiveness, reliability, credibility, and
competence. The framework was revised in 1988 when seven of these
elements were blended to shape empathy and warranty. This gave
upward thrust to the extensively well-known RATER model with 5
aspects to measure carrier high-quality.
The framework is an international authority such that every time one

asks the query – “the way to measure carrier nice” – the solution is – “by
using SERVQUAL.”
Five elements of SERVQUAL
1) Reliability
It is the capacity to deliver the promised stage and form of
provider continually and as it should be.
2) Assurance
Politeness and information of the personnel and the extent to
which they could create self-belief and accept as true with the
various customers.
3) Tangibles
The commercial enterprise elements, or carrier components that
our customers see and experience (tangibles), together with
internet site, building, internet site, employees, and gadget.
4) Empathy
The quantity to which the business gives care and man or woman
interest to the employees.
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5) Responsiveness
The willingness of the employees to provide rapid carrier to the
clients.
Those five dimensions perfectly degree the gap between what your
clients expect and their perceptions with regards to their carrier.
SERVQUAL framework is a powerful instrument that facilitates us in:
• Expertise consumer expectations
• identifying the regions that want excellent development
• Patron perceptions for the particular offerings we offer
• focused on training opportunities for the customer support team

Though proper improvement of items used on this framework offers rich
object-stage statistics, the provider quality dimensions ought to be
adjusted for most useful performance in exceptional industries.
2. Follow-up Survey
Observe-up surveys permit us to impeach our clients regarding our
carrier fine. They're higher and greater powerful than post-provider
scores and one-time surveys on the subject of taking pictures precious
client insights. At the same time as most of the groups take into account
the job executed after sending simply one email, the comply with-up
surveys allow that specialize in leads after now not receiving a response
for the primary time.
A way to get the maximum out of an observe-up survey
• Start with developing an attractive difficulty line for the survey; this
is the most vital aspect for the achievement of a survey.
• Spend money on some clever and intuitive online survey maker
that includes survey query examples to assemble smart surveys.
• Incentivize the survey if we want our customers to spend 5 or 10
minutes on answering questions that are all approximately the
offerings we offer.
• Influenced customers are the maximum critical property of an
emblem. So, let them understand that they depend on if we wish
them to be responsive to our questions and worried with our
emblem.
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3. in-app Survey
Some other credible method for service quality measuring is the in-app
survey. The in-app surveys we could us ask questions to our internet
site traffic while they're logged-directly to our internet site or the usage of
our app. That is one of the maximum direct ways to accumulate client
statistics and doesn’t depend upon emails for accumulating responses.
We are able to both hold the in-app survey crisp and short with one or
two questions and add more than one question in it.
The in-app surveys permit convenient and applicable facts collection and
offer direct and speedy insights into consumer behavior.
If we ask, “what's the exceptional degree of first-class for a provider firm”
the solution is purchaser pride and remarks. And the in-app surveys are
a success for measuring provider great due to the fact they reduce the
friction among the seller and consumer.
The customers ought not to take a few greater times out of their
schedules to reply to the questions. They can accomplish that, while
using our website or apps, without breaking the glide to an extra degree.
This also will increase their log-on time and increases the probabilities of
customers taking part inside the survey.
4. Customer Effort Score (CES)
When we want to recognize “what's carrier high-quality”, flip to the
enterprise specialists who say
Groups fail to understand the volatility of the present-day clients who
need something more to be unswerving and aware of a logo as it
wishes.
This ‘client delighting’ equipment no longer simplest exceed the price of
operations; however, they may be additionally the proper indicators of
the reality that the payoffs are marginal.
So, rather than specializing in “delighting” our clients, we have to make it
as easy as feasible for them to get their issues resolved. This is what
leaves the biggest, superb impact on the minds of the clients.
So, instead of asking questions like “How satisfied are we with XYZ
service” we must ask,
“How a good deal attempt did it take to get our queries resolved”.
This metric is referred to as CES or consumer attempt score, and it
should be as low as viable. The decreased score suggests that our
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customers are without problems getting what they need from us as a
seller.
CES permits us to acquire the most insightful details about the patron’s
enjoyment and can be measured effectively. For this reason, it is one of
the commendable and dependable methods to measure service first-
class.
5. Social Media monitoring
Social media has emerged as a powerful device to be to be handed to
our customers 24X7. For an era that is always on-line, it's miles vital for
a logo to be on-line as well. So, mere responses to direct social media
mentions are not enough. One has to reveal and not forget oblique
mentions and casual tags as properly.
Social media monitoring offers first-rate digs when it comes to
customers, and those in popular, sharing their brand studies and
frustrations online. Fib, Twitter, Yelp, and review portals are some of the
exceptional locations wherein we are able to find tremendous insights
approximately our carrier nice.
Now, the query is – the way to degree carrier great through social media
tracking.
Whilst social media is the source of noticeably unstructured blocks of
facts, it is also in which we can research the Gap lot and something that
is wrong with regards to customer satisfaction. By investing inside the
proper gear that is powered with the aid of the AI and ML talents, we will
discover the records styles and keep music of the carrier pleasant. A
number of the manufacturers which might be commendable examples of
refining their carrier exceptional dimensions through social media
monitoring are JetBlue airlines, Tesco, and Amazon, and so on.
5. Tracking carrier quality Metrics
Monitoring service quality metrics empowers us to supply a goal and
quantitative analysis of our provider. Whilst those metrics aren’t enough
to degree provide high-quality with the aid of themselves, they play a
vital role in figuring out the development regions.
Some of these metrics are:
• Extent per channel (monitoring the range of inquiries from one
channel)
• Response Time (common time among distinct responses to the
incoming queries)
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• First response time (Time taken to ship the primary reaction to the
incoming client queries)
• First touch decision ratio (Ratio of the quantity of problems
resolved inside the first attempt to the wide variety of responses
requiring extra responses for decision)
• net Promoter score (it's miles gold standard client enjoy metric
that ranges among -100 and a hundred and suggests the
willingness of clients to advocate a particular brand presenting)
• Replies in line with price ticket (A measure of patron attempt and
efficiency, it represents the average wide variety of responses
required through our group for price tag closure.)
• Backlog influx/Outflow (assessment of the wide variety of
incoming queries and the range of closed tickets.)
• Consumer achievement Ratio (Ratio of the number of 100%
satisfied clients to ones that have been now not capable of locate
what they were searching out)
• “Handovers” in keeping with trouble (Numbers of CS specialists
concerned for resolving a trouble)
• Things gone incorrect (wide variety of disasters or lawsuits in

every incoming question)
• On the spot service/Queuing Ratio (Ratio of clients that were
given immediate resolutions to those that needed to await
decision).
• average Queuing waiting Time and so on (average wait or
queuing time for every consumer)
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Let us sum up
In this unit we have understood the need for and importance of
measuring service quality. This is also helpful for businessman to
upgrade their service from the feedback and analysis they get while
measuring the feedback from customer regarding the services provided
expectations vs. service provided by the business unit. In this unit we
have also understood the five aspects of SERVQUAL.
CHECK YOUR PROGRESS
1. Which of the following statements pertaining to the SERVQUAL
scale is
Correct
a) SERVQUAL compares perceptions to what customers would
Normally expect
b) SERVQUAL is a 22-item scale
c) SERVQUAL consists of four service quality dimensions
d) SERVQUAL compares perceptions to what a customer should

expect from a Firm the delivers high-quality services
2. Which of the following statements pertaining to the SERVQUAL scale
is Incorrect?
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a) The SERVQUAL dimensions were obtained through extensive
focus group interview.
b) SERVQUAL is a 44-item scale
c) SERVQUAL consists of five service quality dimensions
d) The smaller the gap score for each of the service quality
dimensions, the lower the level of service quality provided
3. which of the following is not one the five dimensions that is measured
by the SERVQUAL SCALE
a) Tangibles b) employee satisfaction
c) Responsiveness d) assurance
4. The SERVQUAL dimension that measures consumer views of the
firm's personnel and communication materials is the ________
dimension.
a) Tangibles b) employee satisfaction
5. Employees of excellent companies will be neat in appearance is a

typical statement within the __________ dimension of the SERVQUAL
scale.
a) Tangibles b) reliability
6. The __________ dimension is an assessment of the firm's
consistency and dependability in service performance.
a) Tangibles b) empathy
c) Assurance d) reliability
GLOSSARY
Quality assurance : the process of monitoring and maintaining a

predetermined customer support standard.
Quality assurance methods include email, chat,
and call monitoring; contact scoring based on
the support standard; and regular feedback to
agents.
Customer loyalty : Customer loyalty is when customers reward a

company with repeat business over time. Loyal
buyers consistently choose to do business with
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a particular brand and often defend it against
its competitors.
Customer : Customer retention refers to a company’s

retention ability to turn customers into repeat buyers and
prevent them from switching to a competitor. It
indicates whether your product and the quality
of your service please your existing customers.
It’s also the lifeblood of most subscription-
based companies and service providers.
Customer needs : Customer needs are the psychological and

physical motivations that make someone want
to purchase a product or service and stay loyal
to that business.
SUGGESTED READING
1) Jadish Seth, et al, Customer Relationship Management
2) Kaushik Mukherjee, Customer Relationship Management,

3) S.Shanmugasundaram, Customer Relationship Management,
WEB RESOURCES
1. Operations Management | Measuring Service Quality Gaps
Using SERVQUAL Model | AKTU Digital Education - YouTube
2. Defining & Measuring Service Quality || Service Marketing || Dr.
Arun Bhatia || MBA || TIAS || - YouTube
3. Master Class: Improving Service Quality - YouTube
ANSWERS FOR CHECK YOUR PROGRESS
1. a) 2.d) 3.b) 4.a) 5.a)
2.d)
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BLOCK 5
TRENDS IN CRM
UNIT 16 : CRM: DATA WAREHOUSING AND DATA
MINING AND SOFTWARE PACKAGES
UNIT 17 : MARKET BASKET ANALYSIS (MBA)
UNIT 18 : CHANGING CORPORATE CULTURES AND

CONTEMPORARY ISSUES
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UNIT 16
CRM: DATA WAREHOUSING AND

DATA MINING AND SOFTWARE
PACKAGES
STRUCTURE
Overview
Learning objectives
16.1 Introduction
16.1.1 Trends in CRM

16.2 Relationships among CRM, Data Warehouses & Data Mining
16.2.1 Data Warehousing
16.2.2 Data Mining
16.3 Major Benefits for a company that uses CRM
16.4 An introduction to CRM packages
Let us sum up
Check your progress
Glossary
Suggested readings
Answers to check your progress
OVERVIEW
CRM is a competitive arena, growing space. Everyone talks about

providing best-in-class customer experiences, about CRM strategies and
solutions, and about the vital role CRM plays in catapulting companies,
forward as marketplace demands intensify, but very few understand the
real application of CRM program to multiply their business.
Data warehousing of huge customer data base is an important
component to make our CRM program successful. Not only compiling
the necessary data but also mining the data from the customer database
is an important task. In this unit we will learn about the latest trends of
CRM, how data warehousing and data mining would help businessmen
to run their business successfully. Choosing the right CRM software is
vitally important to maximize sales and build customer relationships.
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From collecting lead information to managing customer data, the best
CRM software can help business people meet their goals.
LEARNING OBJECTIVES
After studying this unit, you will be able to
• explain the need for and importance of the latest techniques of
CRM program.
• explain the concepts of data warehousing and data mining.
• assess how Customer self-service CRM (CSS) will be an
important customer service strategy in the future.
• describe the CRM software packages

16.1 INTRODUCTION
As we all know, change is inevitable! Even something as massive as a
pandemic can’t stop it, like every other business the CRM industry, too,
had faced lot of issues and challenges in the past. The
enablement benefits from CRM will evolve rapidly as more organizations
utilize the platform to elevate their narrative further up the value chain
where a customer’s senior decision-makers seek guidance on how to
accelerate digital business outcomes. Customers seek meaningful and
substantive information that’s tailored to their specific business situation.
Keeping these thoughts in mind, let’s take a closer look at the top trends.
16.1.1 Trends in CRM
• Voice and Conversational
o Conversational Tools
• Artificial Intelligence
o Automation
o Analytics
o The AI Reality
• Internet of Things
• Mobile and Social CRM
• Customer Experience
• Usability
• Integration
• Self-Service CRM
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• Young Generation’s Interest in CRM
• Industry-Specific CRM for SMBs
• Reliance on Data
• Fewer Adoption Barriers
• Axis: Everything as a Service
• Market Movement
1. Voice and Conversational UI
Customer provider professional and speaker say that Future CRM

techniques will consist of monitoring comments, likes and stocks in a
principal place, supplying insights into lengthy-time period social media
tendencies and behavioral styles of clients for destiny advertising and
marketing campaigns.
• Machines will understand while clients don’t get the solutions
they’re searching out and flow them seamlessly to a stay agent or
salesclerk.
• CRM structures should additionally provide voice era with AI and
system getting to know to offer each record and insights.
a) Conversational Tools
• Chat bots: in particular useful resource customer support efforts.
These levels from supporting customers discover solutions to
directing possibilities or clients to an appropriate place of their
search.
AI has widespread cap potential to transport past simple inquiries.

“In the approaching years, it could be feasible for chat bots to
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apply herbal language processing, deep neural networks and
conversational skills to realize purchaser inquiries, even as
robotically offering the right response,”.
• Natural Language Processing (NLP) This function allows
computer systems to efficiently speak with clients through
information human language. Several approaches NLP can play a
function in customer support are:
• Determining which requests is the very best priority.
• Classifying the ones requests so marketers realize what’s
maximum pressing or essential and might reply accordingly.
• Analyzing purchaser emails to higher recognize their sentiment.
• Voice assistants Thanks to merchandise like Alexa, voice
assistants aren’t virtually new, and none can deny their popularity.
Forecasts advise that the variety of virtual voice assistants will
attain billion units, more than a few better than the arena’s
population.
Moreover, the enterprise leaders are constructive approximately
voice AI evolving as a key fashion. Advanced gear coming with
inside the destiny will permit “CRM customers to dictate their
instructions as opposed to manually typing with inside the asked
records.”
AI may also permit moves like recording voice meetings,
developing transcripts and figuring out subjects or phrases which
have a selected that means, Chan said.
2. Artificial Intelligence
The opportunities are almost limitless with regards to making use of AI in
CRM, and the marketplace is large. AI integration with CRM is the
maximum outstanding development poised to steer the enterprise.
“AI could be capable of summarizing the maximum essential attributes to
a purchaser’s dating with the employer. A salesclerk or customer service
agent could be capable of see a precis of the purchaser’s shopping for
styles, interactions, and extra.”
AI must make pointers on the way to enhance customer support in
addition to cross-promote or up promote services and products that the
purchaser clearly desires, he added.
a) Marketing
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• Lead Qualification: AI-powered CRM gear can automate want
analysis. Chatbots and e mail bots assist recognize the precise
requirement of leads and tell income groups to enhance overall
performance and optimize income processes.
• Sentiment Analysis: Analyze purchaser conversations in the
course of calls and determine their emotional state. You can boom
sales in line with purchaser through following person sentiments.
Sales
• Forecasting: Receive correct income forecasts with AI-powered
CRMs. Detect styles in purchaser records and get treasured
insights approximately income predictions, primarily based totally
on which your crew could make plans and optimize processes.
• Customer Churn Reduction: By reading unique styles in
purchaser records, AI can discover the motives for purchaser
churn, supporting you are taking concrete moves to lessen the
churn rate.
b) Data
• Cleaning: Customer records consist of irregularities which includes
anomalies, duplicates and extra, inflicting misguided predictions. AI-
included CRM structures can stumble on cap potential troubles,
smooth duplicates, look for incomplete records and advise moves to
replace antique records that will help you make advanced decisions.
• Entry: You can automate repetitive obligations like records access
that robotically seize records from calls, messages, emails and
pictures and input purchaser records with inside the favored format.
This lets your personnel to awareness on high-cost obligations. With
that in mind, right here are pinnacle AI tendencies really well worth
paying interest.
• Automation experts say AI as a device group can use to extra
efficiently manipulate their relationships with clients. AI could be
capable of “creating ‘customized marketers’ that, thru system getting
to know, find out the number one wants and needs of dealers for
computerized assistance,”.
One of the most important advantages of AI is its potential to take over
tedious, time-eating guide obligations. The last goal is to apply robot
automation to decorate productivity.
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c) Analytics
AI brings predictive analytics skills and records intelligence to the table.
It complements forecasts and enables leverage the records saved in a
CRM, enhancing enterprise outcomes. This consists of famous product
revelations and purchaser segmentation. AI additionally identifies styles
in person conduct to decorate promoting opportunities.
“AI-powered analytics assist income reps without difficulty reply to
marketplace dynamics through offering them with real-time insights into
purchaser preferences, sentiments and a number of different shopping
for triggers,”
The AI Reality Like any fashion, AI has shortcomings. One of the cap
potential downfalls is AI can negatively affect purchaser enjoy.
“Companies are getting enamored with era, and as a result, they get
enthusiastic about it and assume it’s the solution,” “What clearly finally
ends up going on is era places distance among the purchaser and the
employer as a long way as the relationship that could purpose a
purchaser to need to return back returned again.” However, if used
properly.
AI has many supporting functions like:

• AI will assist make our personnel smarter. Integration with our CRM
answer will assist us solution our clients’ questions higher, make
higher recommendations, proactively solution questions they
haven’t but idea of an extra. The capacity to assist our clients and
customize their enjoy could be higher and extra effective than
ever.”
• Business representative and IT expert experience AI and RPA are
getting a primary awareness of software program builders and
poised to be the dominant fashion within the enterprise over the
following couple of years. However, sizeable use continues to be at
the horizon.
A lot of companies have commenced to speak approximately to

approximately them and use the acronyms as buzzwords in advertising
and marketing materials. Right now, there aren’t very many answers
which can be the use of both to their complete cap potential, however,
so as to definitely alternate with inside the close to destiny.
In the approaching years, we must begin to virtually see those standards
utilized.” While a variety of hype surrounds AI, groups want to mood their
enthusiasm over new era with an information of its effect internally and
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externally, in addition to sensible expectancies of what software program
is able to nowadays. This will permit era to grow to be the catalyst for
reaching the last goal: serving the purchaser.
3. Internet of Things IoT
Internet of Things IoT will hold to make widespread upgrades in
purchaser dating management. There’s absolute confidence that
superior CRM structures will take gain of this fashion through connecting
to IoT feeds — proper from clever domestic gadgets to wearable fitness
video display units and cyber security scanners. IoT included CRMs can
offer insights on purchaser conduct that you could leverage to enhance
customer support and create extra customized advertising and
marketing campaigns.
Companies also can proactively stumble on product overall performance
troubles and discover cap potential issues with purchaser satisfaction.
CRM structures are starting to include connections to Iota feeds. IoT
could be a widespread development inside the CRM marketplace,
because it will enhance device overall performance and boom income. It
is expected that, “IoT gadgets can ship records approximately product
troubles, preservation desires and flawed utilization to an organization’s
CRM platform.”
4. Mobile and Social CRM
Mobility has lengthy been a principal element of income activities. But
that doesn’t suggest mobility is a bygone fashion. Advancements in
cellular era and clients’ growing want for steady connectivity display
because CRM structures should offer extra cellular functionalities. As
workforces grow to be disbursed and far flung nearly in a single day in
the course of surprising situations, many groups warfare to get humans
get entry to the simple structures they had to efficiently paintings. This
awaken name goes to be a large driving force of CRM structures.
Businesses could be searching toward CRM to fill the gaps that had
been exposed with inside the past. This way accessibility from
anywhere, anywhere and whenever goes to be very essential.”
Mobile CRM answers have plenty to provide:
• Strong safety functions
• Intuitive interfaces
• Apps that paintings throughout structures
• The transition among on-line and offline environments with ease.
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With the superiority of social media, social CRM, too, has grown to be a
necessity. Customers can proportion them enjoy approximately a
selected emblem whenever with anybody. Hence, being a huge call
within side
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40 West
30 North
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1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
The enterprise isn’t always enough; it’s essential to construct a private

and true reference to your clients. This is precisely why CRM software
program with conduct monitoring skills is in demand. Incorporating social
media channels inside structures lets in income groups to be in contact
with clients and proportion real-time emblem updates.
Many CRM structures nowadays combine with Twitter, Facebook and
LinkedIn; however, destiny structures can also additionally provide
integrations with different structures as well. The significance of
incorporating social networks into CRM gear and techniques is
indisputable. Right from supplying widespread insights to acting as
listening mediums, social media has grown to be vital to CRM activities.
Taken a step further, social CRM additionally helps higher customer
support. Seems like social CRM is to customer support marketers what
cellular CRM is to income reps.
To illustrate, say a purchaser desires a hassle solved. They can hop
onto their desired social media web website online and hook up with the
employer thru messaging or through @tagging a take care of devoted to
customer support troubles. As you examine your cutting-edge CRM —
or study enforcing your first CRM — don’t underplay the cost mobility or
social CRM can carry on your operations, mainly in a post-pandemic
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global in which far flung paintings and disbursed groups are extra not
unusual place than ever earlier than.
5. Customer Experience
Today, corporations revolve around their clients extra than ever, making
purchaser enjoys (CX) a critical emblem differentiator. In the prevailing
scenario corporations throughout the globe discovered that they
understand CX as a number one aggressive factor. People pass in
which the fine enjoy takes them, even extra so on this post-pandemic
era. Consumers prioritize customer support extra than earlier than while
deciding on to do enterprise with a emblem, It is diagnosed that the two
drivers of CRM are excellent enjoy: comfort and opposition. When it
involves CX, comfort is king.
“The employer that’s simplest to do enterprise with is in the end going to
win.” Hence, the maximum a hit CRM structures of the destiny could
have an interface that specializes in ease of use, making records less
complicated to get entry to and analyze. The use of CRM functions for
handy conversation among income and customer support marketers and
clients will be the destiny fashion. These structures will offer content
material that meets purchaser desires, making sure centered
concentrated on and wise segmentation.
Companies additionally want to realize their direct opposition isn’t the
handiest opposition. In the arena of CX, humans don’t have distinct
buckets for distinct groups — e.g., their enjoy with a B2B producer vs. a
luxurious retailer. The provider a purchaser has is being as compared to
the fine provider they acquired from anyone,”. “Customers realize what
an amazing enjoy is like due to the fact they found out it Personalization
is every other CRM fashion really well worth noting. “Personalization will
hold to fashion with inside the high-quality route of significance.
The extra records we positioned right into a CRM approximately the
purchaser, the higher we’ll be capable of automate the personalization.
Customers get the sensation the employer is aware of them higher than
ever,” . CRM structures constructed with wise, real-time skills permit
groups to transport toward an extra connected, purchaser-centric
approach.
6. Usability
The coming few years will result in a “renaissance of simplicity, in which
the focal point shifts returned to creating matters clean and easy to
apply.” CRM structures have grown and advanced a lot during the last
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decade that during a few instances they now mimic ERP structures in a
few regions.
This is tremendous at the surface, however for a salesclerk who’s on the
street and desires to awareness on promoting, or a customer support
rep that’s looking for the proper records quickly, the structures have
grown to be particularly cumbersome.” The alternate within side the
enterprise device and CRM enterprise is much less approximately the
applications, and extra approximately the powerful usage of these
applications.
This will inherently force extra functions round regions which includes
UI/UX and simplicity of use, and also will force tighter integrations with
different structures which includes ERP and CPQ
7. Integration
With the upward push of state-of-the-art CRMs and area of interest tech
gear, income and advertising and marketing groups may have the liberty
to apply fewer gear than earlier than. Businesses will create extra
integrations to make sure higher consequences from the tech stack.
Look for an answer that integrates different essential software program
answers. They should act ‘in concert’ with every different, as though
they're one.
We should have an answer that offers us what has been known as an
‘unmarried pane of glass,’ that means our crew individuals don’t must
preserve bouncing round from one software to the next.” Along with
advertising and marketing automation, customer support gear and e
mail, analytics software program and purchaser records structures
(CDP) are applicable integration opportunities. Integration is something
of foremost cap potential for as well: Most cutting-edge era CRM
structures do an amazing activity of monitoring inner income activities.
But there’s nevertheless a large quantity of outside interactions that
manifest out of doors of the CRM device. There’s a wealth of records to
be had out of doors the partitions of the CRM utility and it'll be as much
as the producers of those apps to leverage that records in order that
corporations can faucet into that and higher serve current clients even
as increasing their attain to new clients.” As a CRM consumer or person,
it’s essential to not forget which integrations will fine assist your
operations.
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8. Self-Service
CRM With automation turning into synonymous with CRM, bots are
finishing extra touch control responsibilities and saving time for group
members. Chatbots to be had in structures like Drift and HubSpot
mechanically manual possibilities through advertising and income
pipelines. With self-provider, clients can install accounts, pay bills,
troubleshoot troubles and get solutions to their queries quicker without
the assistance of a provider rep.
Hence, client self-provider CRM (CSS) is something we have to
encompass in our customer support method or even extra so due to the
fact it’s honest to implement.: From a enterprise perspective, CRM is
beginning to evolve and which means much less approximately simply
taking pictures interactions and client touches, or logging assist calls.
More and extra clients are needed as a way to locate the matters they
want without the help of a real person. This approach that groups are
making an investment extra in self-provider client portals and structures
that provide customers the equipment they want to do such things as
appearance up and pay tremendous invoices, locate documentation
approximately merchandise and log assist issues.”
In order to assist [self-service], it’s critical that the CRM device be tightly
coupled (or a part of) the back-workplace ERP device. This degree of
self-provider calls for information from more than one practical region to
be to be had to the CRM.”
9. Young Generation’s Interest in CRM
As millennials take over the workplace, the person base of CRM
software program is transferring to a more youthful generation. This
CRM fashion will develop as millennials and Gen Z remain the decision-
makers, observed via way of means of the following generations getting
into the workplace. In the last decade ahead, groups become extra tech-
centric and try and maximize overall performance through shrewd CRM
technology. As extra freelance equipment includes CRM functionalities,
freelancers can also be a developing person section of CRM.
10. Industry-Specific CRM for SMBs
Pandemic has added us to WFH work from home culture, lockdowns
and huge layoffs throughout industries, mainly to the delivery of
solopreneurs. These are individuals who need to marketplace their
thoughts on their own, and apparently enough, the new-age CRMs quite
nicely cater to small corporations like these. Industry-orientated CRMs
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are designed with precise enterprise desires in mind, providing
specialised features.
Since SMBs can experience CRM advantages simply as groups aiming
for mass marketplace success, it’s anticipated that there may be CRMs
for area of interest markets. Insurance, actual property, banking,
healthcare, hospitality, name centers, production and loan are a few
industries which have visible tailored CRM equipment, and the fashion
will keep growing withinside the following couple of years. Vertical-
precise CRMs will provide extra superior features. In fact, famous
industries can also additionally quickly pick from lots of custom designed
CRM structures.
For instance, actual-property CRMs catering to agents and companies
assist manipulate belongings transactions, generate leads and screen
listings. Whereas HIPAA-compliant healthcare CRMs provide
functionalities together with affected person file control and affected
person provider assist at the same time as adhering to regulations.
11. Reliance on Data
In destiny groups can have a deeper reliance on CRM and enterprise
structures, taking pictures the whole lot, this is going on to offer one
supply of truth. When you can’t stand up out of your table and move ask
a person in shopping in the event that they have a replica of a PO on
their table, the whole lot being withinside the device turns into that rather
more critical.” With state-of-the-art analytics, your enterprise can
become aware of troubles, answers and opportunities. Hence, the
choice of effective analytics equipment that assist enhance the
technique and get admission to actual-time information will keep
increasing. These have to encompass superior analytics together with
income pipeline overall performance, client happiness and elements that
make contributions to churn price.
12. Fewer Adoption Barriers
Common limitations to adopting a CRM encompass pricing and shortage
of sources and implementation knowledge. However, with CRMs getting
cheaper, less difficult to apply and easier to implement, the adoption
price is anticipated to increase.
13. XaaS: Everything as a Service XaaS
Everything as a Service appears to be the following massive issue, that
may rework any IT characteristic into provider for organisation
consumption. These encompass any computing provider — proper from
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the platform as a provider (PaaS) to infrastructure as a provider (IaaS)
— added through the net with subscription costs as opposed to an in
advance cost.
14. Market Movement CRM’s
Market Movement CRM’s explosion has been nicely documented, and
it’s expected to keep strong, with the marketplace developing hugely.
CRMs have turned out to be any such relevant a part of a enterprise’s
tech stack, displaying different groups the profits to be had. Now that
CRM has turn out to be a ubiquitous term,” he said, “loads of smaller
income departments are beginning to see the fee in having based
information and are starting to make use of genuine CRM structures to
manipulate their information.” The enterprise boom has introduced
adjustments at the seller degree as groups are trying to find to reinforce
their offerings. Dozer believes the recognition of CRM is a superb issue
for companies and the destiny of CRM is promising.
16.2 RELATIONSHIPS AMONG CRM, DATA WAREHOUSING &

DATA MINING
The way data is ordinarily stored is in a series of databases, there's one
for sales force automation, one for the call center and so on. The
problem with these information silos is they have limited, if any, insight
into other databases in the company. That means instead of offering an
integrated, 360-degree, view of the customer, the data is spread over
several different sources, and it is anything from difficult to impossible to
get a complete picture of the customer's interactions with the company.
As a result, most companies have trouble tracking down critical
information on the history of the customer's transactions with the
company. The answer to this problem is a data warehouse.
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16.2.1. Data Warehousing
A data warehouse is a special kind of database that is easy to
extract data from and do data analysis on. In the context of CRM, it is
designed to provide a complete view of the customer as distinct from the
data silos you often get from a conventional transactional database.
Since it is designed strictly for analysis rather than supporting
transactions, it is usually faster at such tasks than the transactional
database that runs the company. Although an integrated database can
do just about anything a data warehouse can do, the data warehouse is
designed to do analytical tasks faster and easier than an ordinary
database.
A data warehouse is the ideal way to store a full 360-degree view of the
customer to guide customer interactions. Data warehouses were
originally designed for large companies with a lot of data they needed
analyzed. Originally, they were large programs that ran on mainframes
or big minicomputers. They were expensive, complex and required the
care of experts. What was worse was they were just about
undecipherable to anyone but experts.
Like everything else in the computer business data warehouses have

changed markedly over the years. Now smaller, cheaper data
warehouses are available with front ends that are easier to non-
specialists to use. As a result, data warehouses have proliferated even
in small and medium-sized businesses.
The data warehouse accepts data from many different sources,
including billing systems, order systems, ERP, human resources,
point of sale, web servers, marketing databases and call center
systems. All that information is related to specific customers and stored
in an integrated fashion. This is extremely valuable not only for analyzing
what is happening with the company, but also for dealing with
customers.
Given the right user interface any employee who has contact with the
customer can have instant access to the customer's history with the
company from any touch point. This makes things much more
convenient for the employee and much smoother in the interaction with
the customer.
The logical question, then, is why more companies don't use data
warehouses for their CRM data. The answer usually boils down to
questions of time and money. Data warehouses don't erect
themselves. They have to be built up and ideally, they should be
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incorporated into the CRM process from the very beginning. However,
building a successful data warehouse takes time.
Data warehouses are fairly complex structures, and they need the
attention of an expert when they are first built. (After they are up an
running, non-experts can use them very effectively, but they need a
database architect to set them up properly.) Money is another
consideration. Although data warehouses are much more affordable
than they used to be, they are still not cheap.
The company has to allocate the resources to support the data
warehouse, both initially and to keep it functioning effectively. Many
companies are reluctant to make the investment necessary to set up a
data warehouse for CRM. As a result, they limp along with a collection of
CRM silo databases that are not properly integrated.
16.2.2. Datamining
Data mining is the process of looking at the data stored in a
company's database to determine if statistically relevant trends
exist. By identifying these trends and patterns, companies can develop
strategies to better serve their customers and at the same time increase
their sales.
Data mining includes the utilization of refined data analysis tools to find
previously unknown, valid patterns and relationships in huge data sets.
These tools can incorporate statistical models, machine learning
techniques, and mathematical algorithms, such as neural networks or
decision trees. Thus, data mining incorporates analysis and prediction.
Depending on various methods and technologies from the intersection of
machine learning, database management, and statistics, professionals
in data mining have devoted their careers to better understanding how to
process and make conclusions from the huge amount of data, but what
are the methods they use to make it happen?
In recent data mining projects, various major data mining techniques
have been developed and used, including association, classification,
clustering, prediction, sequential patterns, and regression.
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1. Classification
This technique is used to obtain important and relevant information

about data and metadata. This data mining technique helps to classify
data in different classes.
Data mining techniques can be classified by different criteria, as follows:

i. Classification of Data mining frameworks as per the type of
data sources mined: This classification is as per the type of data
handled. For example, multimedia, spatial data, text data, time-
series data, World Wide Web, and so on.
ii. Classification of data mining frameworks as per the database
involved:
This classification based on the data model involved. For example.
Object-oriented database, transactional database, relational
database, and so on.
iii. Classification of data mining frameworks as per the kind of
knowledge discovered: This classification depends on the types
of knowledge discovered or data mining functionalities. For
example, discrimination, classification, clustering, characterization,
etc. some frameworks tend to be extensive frameworks offering a
few data mining functionalities together.
iv. Classification of data mining frameworks according to data
mining techniques used: This classification is as per the data
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analysis approach utilized, such as neural networks, machine
learning, genetic algorithms, visualization, statistics, data
warehouse-oriented or database-oriented, etc.
v. The classification can also take into account, the level of user
interaction involved in the data mining procedure, such as query-
driven systems, autonomous systems, or interactive exploratory
systems.
2. Clustering
Clustering is a division of information into groups of connected objects.
Describing the data by a few clusters mainly loses certain confined
details but accomplishes improvement. It models data by its clusters.
Data modeling puts clustering from a historical point of view rooted in
statistics, mathematics, and numerical analysis. From a machine
learning point of view, clusters relate to hidden patterns, the search for
clusters is unsupervised learning, and the subsequent framework
represents a data concept. From a practical point of view, clustering
plays an extraordinary job in data mining applications. For example,
scientific data exploration, text mining, information retrieval, spatial
database applications, CRM, Web analysis, computational biology,
medical diagnostics, and much more.
In other words, we can say that Clustering analysis is a data mining
technique to identify similar data. This technique helps to recognize the
differences and similarities between the data. Clustering is very similar
to classification, but it involves grouping chunks of data together based
on their similarities.
3. Regression
Regression analysis is the data mining process used to identify and
analyze the relationship between variables because of the presence of
the other factor. It is used to define the probability of the specific
variable. Regression, primarily a form of planning and modeling. For
example, we might use it to project certain costs, depending on other
factors such as availability, consumer demand, and competition.
Primarily it gives the exact relationship between two or more variables in
the given data set.
4. Association Rules
This data mining technique helps to discover a link between two or more
items. It finds a hidden pattern in the data set.
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Association rules are if-then statements that support to show the
probability of interactions between data items within large data sets in
different types of databases. Association rule mining has several
applications and is commonly used to help sales correlations in data or
medical data sets.
The way the algorithm works is that you have various data, for example,
a list of grocery items that you have been buying for the last six months.
It calculates a percentage of items being purchased together.
These are three major measurements technique:
• Lift
This measurement technique measures the accuracy of the
confidence over how often item B is purchased.
(Confidence) / (item B)/ (Entire dataset)
• Support
This measurement technique measures how often multiple items
are purchased and compared it to the overall dataset.
(Item A + Item B) / (Entire dataset)
• Confidence
This measurement technique measures how often item B is
purchased when item A is purchased as well.
(Item A + Item B)/ (Item A)
5. Outer detection
This type of data mining technique relates to the observation of data
items in the data set, which do not match an expected pattern or
expected behavior. This technique may be used in various domains like
intrusion, detection, fraud detection, etc. It is also known as Outlier
Analysis or Outilier mining. The outlier is a data point that diverges too
much from the rest of the dataset. The majority of the real-world
datasets have an outlier. Outlier detection plays a significant role in the
data mining field. Outlier detection is valuable in numerous fields like
network interruption identification, credit or debit card fraud detection,
detecting outlying in wireless sensor network data, etc.
6. Sequential Patterns
The sequential pattern is a data mining technique specialized
for evaluating sequential data to discover sequential patterns. It
comprises of finding interesting subsequences in a set of sequences,
where the stake of a sequence can be measured in terms of different
criteria like length, occurrence frequency, etc.
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In other words, this technique of data mining helps to discover or
recognize similar patterns in transaction data over some time.
7. Prediction
Prediction used a combination of other data mining techniques such as
trends, clustering, classification, etc. It analyzes past events or instances
in the right sequence to predict a future event.
Another example of CRM might be the evaluation of data purchased
from a company that specializes in collecting demographic data on
purchasers, including such data as location, age, gender, ethnicity,
home ownership, employment status, and income level, to determine
which individuals might have a requirement for the company’s product or
services.
• CRM can improve services and products in other ways as well. For
instance, if an organization offers a call center that provides
customer support, tracking the kind of support that is provided most
frequently might lead to solutions that could prevent the problems
from happening in the first place.
Using complex statistical analysis software programs known as data
mining tools, data analysts are able to query the data warehouse in a
multitude of ways. For instance, an analyst might ask the data mining
tool to retrieve from the database all purchases made during the week of
June 17 in which two specific products were purchased together in
stores in their East Coast region. Then, once the records are returned,
the analyst would ask the tool to show only those purchases in which a
statistically relevant correlation between the two items existed.
16.3 MAJOR BENEFITS FOR A COMPANY THAT USES CRM
With CRM software, a company can track how long current customers
have been with the company, how often they purchase from or use the
company's services, and other key information. Rewarding customer
loyalty does more than simply make customers feel good about the
company; it can actually improve the company's Think credit cards,
frequent flyer programs, special offers for loyal customers, and other
rewards programs.
It’s widely accepted that customers and prospective customers judge
companies based on how well the company handles customer issues
and complaints. CRM can facilitate the handling of customer problems
because CRM systems allow for a more rapid response to queries and
concerns by forwarding the query to the right department. And members
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of each department have access to all the relevant information, enabling
them to answer queries and resolve problems quickly and easily. This
ability to resolve complaints quickly and fairly makes a real difference to
customers’ perceptions of the company.
16.4 AN INTRODUCTION TO CRM PACKAGES
Organizations expect a lot from today ‘s Enterprise-andrightlyso. Applic
The market trends have been driving this and the environment, which is
influencing the scenario of single ERP vendor, less customization, more
frequent upgrades, integrated modules, web services, vendor
consolidation and outsourced support and hosting etc. Our solutions
revolve around the Organizations‘ requirements to:
• Standardize processes and Domain-specific Customizations
• Integrated Operations and Application Management, Integrated
Helpdesk and infrastructure services
• De risk through discrete application outsourcing
• Reporting and analysis of business performance

• An introduction to CRM packages
• Our Enterprise Resource Planning Solutions, extend to all realms
of business
• Forecasting and Budgeting
• Post Mergers and Acquisition IT integration
• Financial Reporting and Analysis
• Governance and Compliance
• Risk Management
• Accounts Receivable and Dispute Management Process
• We take cognizance of the following areas of concern while
proposing an ERP implementation solution to our customers.
Oracle
• Oracle is the leader in the CRM field. The company currently offers
50 CRM applications that are able to provide for all the customer
service requirements of small, medium and large industries.
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• Oracle provides CRM applications that aid the organization through
improved business processes. What does Oracle have to offer? The
answer is accurate information. In addition to that the functionality it
offers is just as important.
• It manages to provide excellent support for all departments within the
organization like customer support and added services.
SAP
• SAP was established in 1972 and is now a leader in the provision of
business solutions for all types of industries. It is a CRM software
vendor that caters to businesses worldwide and currently serves
more than 32,000 customers. SAP has a presence in more than 50
countries. It is the world's largest business software company. It is
the world's third-largest independent software provider overall and
employs more than 35,000 people.
• They are able to provide excellent customer service and support. It
boasts of having the Knowledge, Experience, and Technology that
is needed to optimize Business efficiency. It manages to provide a
range of solutions that cater to every aspect of the business.
The benefits from SAP are:

• Better efficiency
• Cost reduction
• Better performance
• Adaptability to business environment
• Overall Growth
• SAP
SAP offers several solutions for Customer Relationship Management
and is able to deliver customer-centric solutions that revolve around
each customer. It helps the organization to support the various
departments like marketing, sales, and service and provides them with
good analytics as well as excellent interaction capabilities.
SAP CRM supports the customer-related processes and deals with all
customer-related activities across all departments. It sources and
gathers together all customer data in the organization in order to
facilitate better decisions. It enables company's address their business
needs adequately, manages to achieve the business objectives and
reaps the required return on investment.
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e-Commerce
Ringent provides Full lifecycle IT services for ecommerce and e-
business to address supply side and buy side needs of retailers and
consumer product manufacturers. Our eCommerce CoE has capabilities
in providing SOA based integrated back-end e-Business solutions, Web
2.0 technologies and creating a multichannel buying experience through
a robust Multichannel framework.
• E-Commerce Functional components: Order Management,
Catalog Transaction Reporting, Business Intelligence
• B2C: Personalization, Live Chat, Community, email Marketing
Social Networking
• B2B: Collaboration, Product Information Management, Customer
Web Store, Promotions Management
• Design & Blueprint, Application Development & Integration,
Application Management,
• User Interface & Web site Response time optimization

Infrastructure: 24x7 support, Managed hosting services, PCI
compliance.
LET US SUM UP:

In this unit we have understood the importance of Data warehousing and
data mining. We also understood how these two would support
businesses to upgrade their customer relationship. This is a very useful
technique for business to keep track of their customers’ tastes and
expectations. This could help businesses maintain good relationship with
their existing customers and also to develop new customer groups. In
this unit we have understood different techniques which can be adopted
by companies to track their customer requirements.
CHECK YOUR PROGRESS
1. The SERVQUAL dimension that is typically noted as the least
important by customers is the __________ dimension.
a) tangibles
b) empathy
c) responsiveness
d) reliability
2. The SERVQUAL dimension that is typically noted as the most
important by customers is the __________ dimension.
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a) empathy
b) responsiveness
c) assurance
d) reliability
3. Which of the following is not a component of a service quality
information system
a) mystery shopping
b) customer retention interviews
c) after-sale surveys
d) employee surveys
4. The component of a firm's service quality information system that is
used specifically to assess employee performance is:
a) solicitation of customer complaints
b) customer focus group interviews
c) employee surveys
d) total market service quality survey
5. The component of a firm's service quality information system that
assesses the firm's and competitor's service quality ratings is:
a) solicitation of customer complaints
b) customer focus group interviews
c) mystery shopping
d) total market service quality survey
GLOSSARY
Conversational : Conversational artificial intelligence (AI) is a set
AI of technologies that can recognize and respond
to speech and text inputs.
Chatbot : A chatbot is a type of conversational AI that
enables businesses to put a layer of automation
or self-service in front of customers in a friendly
and familiar way.
Help desk : A help desk is a centralized team within a
company that serves employees or customers en
masse, using a software product to organize
conversations.
Customer : Customer success is a company initiative or
success department focused on making customers love
your business so much that they want to continue
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buying your products or services. It centers on
building strong relationships and understanding
customers’ goals.
Benchmarking : Benchmarking is a comparison of agent or team
performance against the performance of peers or
competitors.
Customer : Customer experience refers to a (potential)
Experience (CX) customer’s impression of a business, its
employees, its brand, or its products after and
during their interaction with it.
Customer : Customer experience management (C.X.M. or
Experience C.E.M.) is the term used to define a company’s
Management processes and resources for managing and
(CXM/CEM): improving customer experiences.
SUGGESTED READINGS
1. Earls, A. (2014, January). Predicting the future of CRM in 2014
and beyond. Retrieved February 21, 2014,
from http://searchcrm.techtarget.com/feat...014-and-beyond.
2. McKoen, A. (2012, December 27). Top five CRM trends you
should know about. Retrieved February 22, 2014,
from http://searchcrm.techtarget.com/phot...ontentCompress.
3. Reynolds, G. (2012). Ethics in Information Technology. Boston:
Course Technology Engage Learning.
WEB RESOURCES
1. Top 10: CRM Trends in 2022 - Bing video
2. Data Warehouse Tutorial For Beginners | Data Warehouse
Concepts | Data Warehousing | Edureka - Bing video
3. Data Warehousing Tutorial - 1 | Data Warehousing Tutorial for
Beginners - 1 | Edureka - Bing video
4. Data Mining class presentations (16) - YouTube
ANSWERS FOR CHECK YOUR PROGRESS:

1. a) 2.d) 3.a) 4.c) 5.d)
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UNIT 17
MARKET BASKET ANALYSIS (MBA)

STRUCTURE
Overview
Learning objectives
17.1 Introduction to Market Basket Analysis (MBA)
17.1.1 Methodology
17.1.2 Working of Market Basket Analysis

17.2 Types of Market Basket Analysis
17.2.1 Descriptive Market Basket Analysis
17.2.2. Predictive Market Basket analysis

17.2.3. Differential Market Basket Analysis
17.3 Algorithms associated with Market Basket Analysis
17.3. 1 Examples of Market Basket Analysis
17.4 Benefits of Market Basket Analysis
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
In this unit we would learn about market basket analysis, its impact and
its applications. We would also understand the advantages of applying
MBA (Market Based Analysis) techniques in identifying the customer
preferences.
LEARNING OBJECTIVES
• explore what Market Basket Analysis MBA
• explain how MBA can be useful for businessmen

• examine the uses and implementation of MBA
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• discuss the different types of MBA
17.1 INTRODUCTION TO MARKET BASKET ANALYSIS (MBA)
Market Basket Analysis is one of the most common and useful types of
data analysis for marketing. It is an algorithm that examines a long list of
transactions in order to determine which items are most frequently
purchased together.
The purpose of market basket analysis is to determine what products
customers purchase together. It takes its name from the idea of
customers throwing all their purchases into a shopping cart (a “market
basket”) during grocery shopping. Knowing what products people
purchase as a group can be very helpful to a retailer or to any other
company.
A store could use this information to place products frequently sold
together into the same area. Direct marketers could use the basket
analysis results to determine what new products to offer their prior
customers.
The strength of market basket analysis is that by using computer data
mining tools, it is possible to find out, what products consumers would
logically buy together. Once it is known that customers who buy one
product are likely to buy another, it is possible for the company to market
the products together, or to make the purchasers of one product the
target prospects for another. If it’s known that customers who buy a
sweater from a certain mail-order catalog have a propensity toward
buying a jacket from the same catalog, sales of jackets can be increased
by having the telephone representatives describe and offer the jacket to
anyone who calls in to order the sweater.
By targeting customers who are already known to be likely buyers, the
effectiveness of marketing is significantly increased. This is the purpose
of market basket analysis – to improve the effectiveness of marketing
and sales tactics using customer data already available to the company.
17.1.1 Methodology
The input to a Market Basket Analysis is normally a list of sales
transactions, where each column represents a product and each row
represents either a sale or a customer, depending on whether the goal
of the analysis is to find which items sell together at the same time, or to
the same person. In order to perform market basket analysis, it is
necessary to first have a list of transactions and what was purchased in
each one.
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MBA is a data mining technique used by retailers to increase sales
by better understanding customer purchasing patterns. It involves
analyzing large data sets, such as purchase history, to reveal product
groupings and products that are likely to be purchased together.
The adoption of market basket analysis was aided by the advent of
electronic point-of-sale (POS) systems. Compared to handwritten
records kept by store owners, the digital records generated by POS
systems made it easier for applications to process and analyze large
volumes of purchase data. Implementation of market basket analysis
requires a background in statistics and data science and some
algorithmic computer programming skills. For those without the needed
technical skills, commercial, off-the-shelf tools exist.
One example is the Shopping Basket Analysis tool in Microsoft Excel,
which analyzes transaction data contained in a spreadsheet and
performs market basket analysis. A transaction ID must relate to the
items to be analyzed. The Shopping Basket Analysis tool then creates
two worksheets:
• The Shopping Basket Item Groups worksheet, which lists items that
are frequently purchased together,
• And the Shopping Basket Rules worksheet shows how items are
related (For example, purchasers of Product A are likely to buy
Product B).
17.1.2 Working of Market Basket Analysis
Market Basket Analysis is modeled on Association rule mining, i.e., the
IF {}, THEN {} construct. For example, IF a customer buys bread, THEN
he is likely to buy butter as well.
Association rules are usually represented as: {Bread} -> {Butter}
Some terminologies to familiarize yourself with Market Basket Analysis
are:
• Antecedent: Items or 'item sets' found within the data are
antecedents. In simpler words, it's the IF component, written on the
left-hand side. In the above example, bread is the antecedent.
• Consequent: A consequent is an item or set of items found in
combination with the antecedent. It's the THEN component, written
on the right-hand side. In the above example, butter is the
consequent.
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17.2 TYPES OF MARKET BASKET ANALYSIS
Market Basket Analysis techniques can be categorized based on how
the available data is utilized. Here are the following types of market
basket analysis in data mining, such as mentioned below:
Types of
MBA
Descriptive Predictive Differential

market market basket market
basket analysis basket
:
analysis analysis
17.2.1 Descriptive market basket analysis: This type only derives

insights from past data and is the most frequently used approach. The
analysis here does not make any predictions but rates the association
between products using statistical techniques. For those familiar with the
basics of Data Analysis, this type of modelling is known as unsupervised
learning.
17.2.2. Predictive market basket analysis: This type uses supervised
learning models like classification and regression. It essentially aims to
mimic the market to analyze what causes what to happen. Essentially, it
considers items purchased in a sequence to determine cross-selling. For
example, buying an extended warranty is more likely to follow the
purchase of an iPhone. While it isn't as widely used as a descriptive
MBA, it is still a very valuable tool for marketers.
17.2.3 Differential market basket analysis: This type of analysis is
beneficial for competitor analysis. It compares purchase history between
stores, between seasons, between two time periods, between different
days of the week, etc., to find interesting patterns in consumer
behaviour. For example, it can help determine why some users prefer to
purchase the same product at the same price on Amazon vs Flipkart.
The answer can be that the Amazon reseller has more warehouses and
can deliver faster, or maybe something more profound like user
experience.
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17.3 ALGORITHMS ASSOCIATED WITH MARKET BASKET
ANALYSIS
In market basket analysis, association rules are used to predict the
likelihood of products being purchased together. Association rules count
the frequency of items that occur together, seeking to find associations
that occur far more often than expected.
Algorithms that use association rules include AIS, SETM and Apriori.
The Apriori algorithm is commonly cited by data scientists in research
articles about market basket analysis. It identifies frequent items in the
database and then evaluates their frequency as the datasets are
expanded to larger sizes.
R's rules package is an open-source toolkit for association mining using
the R programming language. This package supports the Apriori
algorithm and other mining algorithms, including arules NB Miner,
opusminer, RKEEL and R Sarules.
With the help of the Apriori Algorithm, we can further classify and
simplify the item sets that the consumer frequently buys. There are three
components in APRIORI ALGORITHM:
• SUPPORT
• CONFIDENCE
• LIFT
For example, suppose 5000 transactions have been made through a
popular e-Commerce website. Now they want to calculate the support,
confidence, and lift for the two products. For example, let's say pen and
notebook, out of 5000 transactions, 500 transactions for pen, 700
transactions for notebook, and 1000 transactions for both.
SUPPORT
It has been calculated with the number of transactions divided by the
total number of transactions made,
1. Support = freq(A, B)/N
support(pen) = transactions related to pen/total transactions
i.e support -> 500/5000=10 percent
CONFIDENCE
Whether the product sales are popular on individual sales or through

combined sales has been calculated. That is calculated with combined
transactions/individual transactions.
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2 . Confidence = freq (A, B)/ freq(A)
Confidence = combine transactions/individual transactions
i.e confidence-> 1000/500=20 percent
LIFT
Lift is calculated for knowing the ratio for the sales.
3. Lift = confidence percent/ support percent
Lift-> 20/10=2
When the Lift value is below 1, the combination is not so frequently
bought by consumers. But in this case, it shows that the probability of
buying both the things together is high when compared to the
transaction for the individual items sold.
17. 3. 1 Examples of Market Basket Analysis
Here are the following examples that explore Market Basket Analysis by
market segment, such as:
• Retail: The most well-known MBA case study is Amazon.com.

Whenever you view a product on Amazon, the product page
automatically recommends, "Items bought together frequently." It is
perhaps the simplest and cleanest example of an MBA's cross-
selling techniques.
Apart from e-commerce formats, BA is also widely applicable to the
in-store retail segment. Grocery stores pay meticulous attention to
product placement based and shelving optimization. For example,
you are almost always likely to find shampoo and conditioner placed
very close to each other at the grocery store. Walmart's infamous
beer and diapers association anecdote is also an example of Market
Basket Analysis.
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• Telecom: With the ever-increasing competition in the telecom
sector, companies are paying close attention to customers' services.
For example, Telecom has now started to bundle TV and Internet
packages apart from other discounted online services to reduce
churn.
• IBFS: Tracing credit card history is a hugely advantageous MBA
opportunity for IBFS organizations. For example, Citibank frequently
employs sales personnel at large malls to lure potential customers
with attractive discounts on the go. They also associate with apps
like Swiggy and Zomato to show customers many offers they can
avail of via purchasing through credit cards. IBFS organizations also
use basket analysis to determine fraudulent claims.
• Medicine: Basket analysis is used to determine comorbid conditions
and symptom analysis in the medical field. It can also help identify
which genes or traits are hereditary and which are associated with
local environmental effects.
17.4 BENEFITS OF MARKET BASKET ANALYSIS
The market basket analysis data mining technique has the following
benefits, such as:
• Increasing market share: Once a company hits peak growth, it
becomes challenging to determine new ways of increasing market
share. Market Basket Analysis can be used to put together
demographic and gentrification data to determine the location of new
stores or geo-targeted ads.
• Behaviour analysis: Understanding customer behaviour patterns is

a primal stone in the foundations of marketing. MBA can be used
anywhere from a simple catalogue design to UI/UX.
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• Optimization of in-store operations: MBA is not only helpful in
determining what goes on the shelves but also behind the store.
Geographical patterns play a key role in determining the popularity
or strength of certain products, and therefore, MBA has been
increasingly used to optimize inventory for each store or warehouse.
• Campaigns and promotions: Not only is MBA used to determine
which products go together but also about which products form
keystones in their product line.
• Recommendations: OTT platforms like Netflix and Amazon Prime
benefit from MBA by understanding what kind of movies people tend
to watch frequently.
LET US SUM UP
In this unit we have learnt about Market Basket Analysis its uses,
implication of the same. Different types of Market Basket Analysis. This
MBA is a application to decide how this would support business man in
with standing completion and survive in the market. We have also
understood the benefits of MBA. This analysis is most used for a
businessman in identifying how to increase sales by better
understanding customer purchasing patterns.
CHECK YOUR PROGRESS
1. The process of removing deficiencies and loopholes in the data is
called ____.
a) Data aggregation
b) Extraction of data
c) Compression of data
d) Cleaning of data
2. Which of the following retail analytic applications involve(s) the use of
search techniques to gain insights into customer's buying patterns?
a) Factor analysis
b) Regression analysis
c) Data mining
d) Data scrapping
3. An Enterprise Resource Planning application is an example of a(n)
______.
a) Single-user database application
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b) Multiuser database application
c) E-commerce database application
d) Data mining database application
4. What do data warehouses support?
a) OLAP
b) OLAP AND OLTP
c) OLTP
d) Operational database
5. What is called as data migration
a) Identify available migration tools
b) Test before migrating
c) Improve the data
d) Find the data

GLOSSARY
Digital customer : Online customer service is the process of

service answering customer questions digitally using
tools such as email, social media, live chat, and
messaging apps.
Customer : Customer dissatisfaction is the antithesis of

dissatisfaction customer satisfaction. It happens when
customer expectations are not only not meant,
but also when the company fails to do anything
about the complaint.
Customer care
: Customer care is when companies treat their
customers with respect and kindness and build
an emotional connection with them.
Data Enrichment : Data enrichment is the method of incorporating

additional details to CRM data, such as a
company’s M&A history, a client’s employment
status, or a contact’s business partners and
peer group. The aim of data enrichment is to
give salespeople more in-depth perspectives
and knowledge about their contacts and
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accounts with as little manual effort as possible.
Data Security : Customer data is typically protected by your

CRM software. This may include any additional
details of the customer that is considered
confidential information and includes contact
details.
Data Sharing : Data Sharing Rules are guidelines to ensure the

Rules confidential data remains confidential. You can
apply these rules to individuals, teams, and
functions.
SUGGESTED READINGS
4. JadishSeth,etal, Customer Relationship Management
Prentice Hall of India Private Limited, New Delhi, 2008.
WEB RESOURCES
1. Unit 4 - Part 2 - Performing the Market Basket Analysis in R -
Bing video
2. MARKET BASKET ANALYSIS IN DATA MINING | Association
Rules Mining | Data Mining Lectures - Bing video
3. Lecture 40: RFM and Market Basket Analysis - YouTube
ANSWERS FOR CHECK YOUR PROGRESS
1. d) 2.d) 3.b) 4.a) 5.d)
216
UNIT 18
CHANGING CORPORATE CULTURES

CONTEMPORARY ISSUES
Overview
Learning objectives
18.1. Introduction
18.1.1 Explaining Culture of innovation
18.2 Cultural challenges

16.3 contemporary challenges in CRM
Let us sum up
Check your progress
Glossary
Reference
OVERVIEW
In this unit we would try to understand the latest updation in the industry
for enhancing the customer experience and how to survive in business
in 21st century.
We would also understand how the c corporate culture would
accommodate and a customer its customers to implement CRM program
into its corporate system.
LEARNING OBJECTIVES

• explain the changing culture in organizations
• Study the changes impact the organizational culture
• State the benefits and drawbacks in changing a culture

• explore contemporary challenges in CRM
18.1 INTRODUCTION
The biggest obstacles standing in the way of innovation are often related
to company culture. Culture consists of various different aspects, such
as ethics, values, collective beliefs, assumptions, working methods and
217
standards, to name a few. Because culture is such an all-encompassing
concept, it’s no surprise that many leaders face challenges when trying
to shape their cultures to be more innovative.
Although it can be almost impossible to avoid every hurdle in the
process, what matters more is the ability to identify the most common
bottlenecks to cultural change and to find ways to remove them.
Changing corporate culture doesn’t just happen overnight. Culture is
such an all-encompassing concept that is affected by so many separate
things that it always takes quite a bit of time and effort to change.
What’s more, as culture is a result of the people in your organization and
people are always resistant to change, you can rest assured that cultural
change will also face resistance.
With that nature, it shouldn’t come as a surprise that there really aren’t
any silver bullets for changing culture. Just setting up an innovation lab
or hiring a number of innovative graduates for internships around the
company can help in the process, but they won’t lead to change at large
without a systematic plan in place.
Cultural change will always be a gradual and iterative process.
18.1.1 Explaining Culture of innovation

Although innovation means different things to different people, there are
certain traits innovative team’s shares. To list out the key characteristics
which explain innovation are
• They closely align innovation strategy with business strategy.
• They create company-wide cultural support for innovation.
• Their top leadership is highly involved with the innovation program.
• They base innovation on direct insights from end-users.
• They rigorously control project selection early in the innovation
process.
The best innovators excel at each of these first five characteristics and
can integrate them to create unique customer experiences that can
transform their market.
What comes to company culture, you can tell a lot about a company and
its culture by observing how people behave – especially when the boss
isn’t around.
The culture of innovation emphasizes on generating and implementing
new ideas and is focused on making constant improvement in various
218
areas of the business. Innovation is all about making progress on a
company level as well as on a personal level. Therefore, the ideal
culture for innovation supports constant learning and experimentation.
18.2 CULTURAL CHALLENGES
Culture is mainly shaped by people; often the most common challenges
are also related to them.
1. Resistance to change
Shaping peoples’ mindsets and attitudes can be challenging. Often,
people have their own, fixed ways of seeing and doing things. While
there isn’t necessarily anything wrong with that, those underlying beliefs
and assumptions can sometimes hinder innovation.
When things have been done in a certain way for a long time, it
becomes the norm. This easily leads to people becoming blind to
possible inefficiencies in their own work and commonly used processes.
Things that have worked well in the past aren’t necessarily guaranteed
to work in the future, which is why it’s important to constantly challenge
your assumptions, be open to change and look for ways to improve the
way you and your teamwork. Getting too content with how things are
now has already proven to backfire in the long run.
In addition to this, people can be resistant to change because they are
afraid of failure. Being afraid of making a mistake is only natural as no
one really wants to be responsible for something that didn’t go quite as
planned. These types of attitudes, however, can be changed by creating
an environment that embraces the “fail fast mentality”. Innovation
involves almost always a certain amount of risk and uncertainty.
Because not all ideas can be successful, it’s important to communicate
that not all ideas are expected to work and it’s ok to fail as long as
people are learning from it.
• Start with small victories
Getting started with changing mindsets is often the hardest part. To
succeed, it’s important to understand why people are against change.
Often, the reason is that they don’t understand what change means for
them. They might, for example, see innovation only as a requirement to
work more but don’t necessarily see the possible positive impacts it can
have on their work.
As a manager of any company your job is to communicate how these
changes affect your team in practice and most importantly, what’s in it
for them. You have to help employees understand why change is
219
necessary for the continuity of the business and the well-being of the
team.
2. Not communicating the purpose
Most of our time awake is spent at work. Without a larger purpose for
what we’re doing, people can easily start seeing their job as just another
paycheck. It can also be difficult to get people give their best at all times.
Without purpose, there’s no direction, and without direction, there’s
really no chance of reaching your destination.
By communicating purpose, it is not to give a lecture on why and how
the change is required for the company. Rather how this change would
benefit them. Make them feel they are an important part of something
that makes a real difference.
In the context of creating an innovative culture, it’s important that people
know why change is inevitable. If, for example, you’re operating in a
declining industry, you simply have to renew in order to survive. It’s your
responsibility to communicate what needs to be changed as well as what
each individual should do for making this change happen
• Create a movement
Communicating the purpose starts with clarifying your vision and turning
that vision into a compelling story people are keen to be a part of. This
helps convince people to align their actions towards the common goal
and join the “movement”.
Even if your situation wasn’t as critical, you should still try to constantly
learn more about your employees and what energizes and motivates
them. Also, when hiring new people to your team, instead of only
emphasizing skill, always look for qualities that can help advance your
grand vision.
3. Rigid organizational structures
Organizational structures are typically quite hierarchical, especially in
larger organizations. Although having some form of hierarchy is
necessary, it might also cause some bottlenecks for innovation if it
restricts information flow.
Often, middle management, which controls the information flow to and
from the front line, ends up as that kind of a bottleneck. Even if
managers would want to hear ideas from the front line, they are often too
busy and thus end up prioritizing their current tasks over innovation.
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Typically, this sends a signal that the employees’ input isn’t appreciated,
which again leads to decreased motivation to share any new ideas.
• Move decision-making closer to the front-line
Innovation should happen at all levels of the organization. When ideas
need to go through several levels of management, there’s a risk that the
feedback and evaluation process will slow down and become ineffective.
For this reason, too high organizational barriers and hierarchy will
eventually kill innovation.
Communication shouldn’t just flow up but also down and across the
organization. If and only if 2-way communications exist in the
organisation there are chances for growth in the business unit and have
a work friendly environment. If middle managers have too much on their
plate, they often only see short-term goals and constant pressure to hit
their performance metrics, which leaves little room for long-term
improvement.
One way to overcome this challenge is to move decision making closer

to the front-line. Managers could talk more about innovation from a
larger perspective and direct the right type of activity by setting goals
that support the right kind of change.
To do that, managers need to trust their employees and let them
execute their ideas but also provide them with certain limits in order to
stay focused. Creating an innovative culture requires just the right
amount of freedom and control.
So, instead of having managers make all the decisions, you should give
more responsibility to those who are willing to take it and are passionate
about moving things forward.
4. Lack of commitment and reinforcement
Another reason why innovation culture efforts fail is low levels of
managerial commitment. If innovation is seen as just an “extracurricular
activity”, it easily gets in the way of daily tasks and routines. If
management isn’t committed, employees aren’t likely to be either.
Innovation isn’t just an activity for times when there’s nothing else to do.
You need innovation to reach your goals now and in the long term.
Innovation is like a habit; it takes time and effort to form one, but once
it’s learned and integrated in daily life, you’ll eventually start seeing
desired results. Just like acquiring any positive habit, scattered and
short-term efforts don’t last. Change rarely happens overnight and
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especially innovation requires a true shift in mindset as well as constant
reinforcement.
Although employees are coming up with new ideas all the time, the real
challenge is to constantly harness those ideas to create more value.
Keep offering interesting challenges to increase activity and excitement.
If active employee involvement isn’t encouraged, you really can’t expect
to see outstanding results because often, the amount of activity
correlates with the outcomes.
• Tie innovation to actual ways of working and reward active
participation
To get the best possible results, innovation should be tied to the actual
ways of working and projects your teams are currently working on. This
ensures that people are always making progress and learning while
doing what they’re supposed to do.
Introducing a few simple performance metrics can encourage people to
keep improving the way they work. Be clear about the common company
goals as well as how the input of each team and individual contributes to
the big picture.
Executive level is also eventually responsible for keeping the

conversation active. An inspiring and innovative environment
encourages rapid exchange of ideas both vertically and horizontally and
constantly provides people with the right kinds of challenges.
In order to keep the ideas flowing, always remember to reward the most
active participants. Give credit for great effort and never underestimate
the power of positive feedback.
16.3 CONTEMPORARY CHALLENGES IN CRM
As a business discipline, CRM helps address the growing complexity of
marketing and sales management teams while improving their
competitiveness. However, the introduction of a CRM system requires a
change in mindset on customer management across departments at an
organizational level. The question is not whether to use it or not but how
to plan a successful CRM implementation. Many organizations do not
wish to commit to a CRM strategy on their own. Also, fear of failure is a
significant issue for the delay or suspension of any IT system
implementation and therefore, it is no exception.
Statistics indicate that 55% to 75% of CRMs are rejected due to a lack of
user acceptance. Identifying the most common causes of CRM
implementation challenges will allow you to be on your guard and try to
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tackle this investment with the right care. Through this blog, we aim to
provide some tips that can help businesses to overcome the
implementation failure.
Critical CRM Implementation Challenges and its Solutions
Implementing a CRM system is a tricky process. It enables the use of
appropriate information technologies to coordinate sales, marketing
activities, and services, and to enhance the customer experience.
Therefore, the challenges of CRM could vary ranging from the wrong
choice of the tool, technological barriers, the inability to adapt to the
current needs of the organization, and the unskillful process of
implementing the system in the organization. It poses a challenge both
for CRM users – individuals and organizations, seeking change in their
approach and process implementation.
Read on as we discuss some of the best practices to avoid/overcome
these CRM challenges to make sure that your CRM implementation
process is a success.
a) Defining Clear Objectives
Many companies fail to identify and define the explicit representation of
why their organization needs a CRM system. This makes it challenging
to evaluate ROI or core benefits of the solution. It is a paramount factor
for CRM applications to be closely linked to both the business objectives
and processes. So, it is vital to take stock of strategies, including short-
term and long-term goals while addressing the organizational needs. It
offers a better idea to define the scope of features required in the CRM.
Thus, aligning the CRM focus with your company strategy can help
avoid CRM implementation challenges.
b) Choosing The Right System
Selecting a wrong CRM is one of the toughest challenges to resolve.
The idea of replacing the existing system with a one that might not be a
good fit for the company, can cause serious disruptions. It is essential to
note that the system’s functionality depends on whether CRM needs
meet the company requirements for now and future. Also, it is crucial to
assess its compatibility with the existing applications within the
company. It is also important to gauge the scope of post-implementation
service scenario.
c) User Adoption
The level of acceptance for the CRM tool and its use in the organization
defines its concrete implementation. However, any new system
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experiences resistance from users. Below are some of the points that
will help outline the benefits of implementing CRM system.
Communicate why CRM is so essential, sharing with them the specific
benefits it offers, such as saving time or increasing sales.
Develop and offer a rewards program for the effective use of the system
and apply penalties for its misuse.
Use the CRM reporting function to help employees see how their actions
directly influence customer satisfaction and their overall performance.
d) Integrating CRM With Existing Systems
Implementation of a central CRM system also involves migrating or

integrating the existing software and information systems. The lack of
support from the vendor staff of the existing methods for CRM
integration will result in a massive burden for the company. As a result, it
may consume hours of productive work time for the staff without
possible outcomes. Therefore, a planned approach to CRM project by
considering future needs will help avoid the implementation overkill.
e) Training
Even the best of CRM systems will not be helpful if users are not able to
use it effectively. Thus, it is imperative that the users are well trained
because the success of the CRM implementation process depends
mostly on this aspect. Further, it is necessary to include the type of
users for the training. It includes regular users, management and
administration teams for the program.
f) Find The Right Partner
It is vital to evaluate business objectives, strategy, budgets, and
customization needs before choosing a CRM solution. As part of this, it
is essential to ensure you have the right partner by your side. They will
help avoid the pitfalls while implementing the CRM system. The partner
must offer consultation with future insights. They must advise on how to
address and eradicate potential risks and challenges for the possible
CRM system.
To conclude, CRM helps simplify your business processes and optimize
efficiency. However, if it is inappropriately chosen or poorly adapted, it
can lead to chaos. As an experienced Dynamics CRM development
company, Rishabh Software helps organizations to overcome the
challenges in CRM implementation by leveraging the benefits of this
tool. Our experts also help global enterprises customize and integrate
Dynamics CRM. It is with their existing enterprise applications. We are
224
CRM Partners of choice to help manage the customer relationship
management lifecycle and making informed business decisions.
LET US SUM UP
In this unit we have learnt how and why change is required for an
organisation. In the present scenario we should always accept the
change. Change in corporate culture should be slowly launched in a
systematic way therefore resistance to change for all stake holders can
be avoided.
CHECK YOUR PROGRESS

1. Which are the most widely used traits in maintaining relationship
marketing?
a) Trust
b) Interpersonal
c) Cultural
d) Knowledge
2. Which of the following are essential skills for a business relationship
manager?
a) Leadership
b) Communication
c) Administration
d) All of these
3. Business relations management means managing relationships
with?
a) Manager
b) Customers
c) Employees
d) All of these
4. What is essential for successful long-term relationships in business?
a) Commitment
b) Money
c) Discount
225
d) Advertisement
5. Which model is essential to build reputation and trust?
a) CRM
b) BRM
c) TRM
d) SRM
6. What can be defined as an ongoing process of identifying and
creating new value with individual customers?
a) CRM
b) BRM
c) TRM
d) SRM
GLOSSARY
On-Premises : CRM software that’s installed on the company’s

premises instead of in the cloud.
Opportunity : A contract that offers the opportunity for future

sale.
Pipeline : A depiction of the sales process and where

prospects are in that process. It includes four
main stages: lead, prospect, opportunity, and
customer.
Prospect : A potential customer that marketing or sales

determines is a good match for the product or
service and in the position to complete the
buying process.
C.H.A.M.P: : It is an acronym for the terms Challenges,

Authority, Money, and Prioritization. It is the
modern approach of qualifying prospects;
SUGGESTED READINGS

226
WEB RESOURCES
1. Culture, Leadership and Change (pwc.com)
2. BCG's Jim Hemerling on Changing Corporate Culture - YouTube
3. Changing the Organizational Culture - Bing video
4. Webinar: Diagnosing and changing organizational culture - Bing
video
ANSWERS FOR CHECK YOUR PROGRESS.
1. b) 2.d) 3.d) 4.a) 5..a)
6. a)
227
228
229
Master of Commerce
SECOND YEAR
(Semester - 03)
MCOS -31
HUMAN RESOURCE MANAGEMENT

www.tnou.ac.in
SYLLABUS
Course Title : HUMAN RESOURCE MANAGEMENT
Course Code : MCOS 31
Course Credit :3
CO1. Develop strong association with the concepts and Practices of

human resources management that aids to achieve
organisational objectives.
CO2. Create a conceptual understanding of planning, deployment and
maintaining of human capital.
CO3. Recognize the importance of Training-need analysis and
designing training programs keeping in view of current and
future requirements.
CO4. Identify the crucial issues in compensation management and
study various salary structures. List out various employee
retention techniques.
CO5. Discuss quality of work life, work life balance and theories
underlying employee relations to introduce the learners on
various aspects of human resources management.
COURSE SYLLABUS
BLOCK I: Introduction to HRM

Introduction to HRM: Human Resource Management: Meaning, Nature,
Objectives, Scope and Functions - Policy and Procedures of the HRM –
Organizing HR - Department Structure and Functions – Managerial and
Operating Functions - Nature of HRM: HRM as a Profession –
Environmental Influence of HRM - Qualities of HR Manager - Role of
HRM Personnel: Line & Staff Roles and Responsibilities of HR
Manager/Departments, HR as a factor of Competitive Advantage
BLOCK II: Human Resource Planning, Recruitment & Selection
Human Resource Planning: Manpower Planning – Strategy
consideration of Planning – Job Analysis – Job Specification – Job
Description - Approaches to Job Design – Job Simplifications – Job
Enlargement – Job Rotation – Job Enrichment - Absenteeism and
Labour Turnover - Recruitment: Recruitment Policy - Problems - Source
of Recruitment – Recruitment Practices in India - Selection: Selection
Process- Selection Methods and Tests - Placement and Induction -
Promotions and Transfers – Demotions and Separations.
BLOCK III: Training & Development
Training and its importance: Training – Need and Importance – Steps in
Training Programme – Techniques of Training -Evaluation of Training
Programmes -Development: Concept of Management Development
Programme – Techniques of Development programmes – Group
Discussion- Conferences and Seminar – Case Studies – Role Playing –
Business Games – Sensitivity Training – Stages of Career Development.
BLOCK IV: Performance Appraisal
Performance Evaluation: Performance Appraisal – Meaning - Need and
Importance – Objectives - Methods of Performance Evaluation:
Methods and Modern Techniques of Performance Appraisal – Requisite
of Good Appraisal Plan – Problems in Performance Appraisal -
Compensation: Compensation Plan – Job Evaluation – Individual –
Group – Incentives – Bonus – Fringe Benefits - ESOP (Employee Stock
Ownership Plan).
BLOCK V: Quality of Work Life

QWL: Quality of working life – Issues in Quality of Working life –
Obstacles in QWL - QC & MBO: Quality Circles – Management by
Objectives - Employee Relations: Joint Consultation and Employee
Participation in Management Collective Bargaining.
REFERENCES
1. Anjali Ghanekar, (2010), Essentials of Human Resource

Management, latest Edition, Everest Publishing House, New Delhi
2. Aswathappa,K (2013) Human Resource Management, Text and
Cases, McGraw Hill Education; Seventh edition, India.
3. Indranil Mutsuddi, (2011), Essentials of Human Resource
Management, latest Edition, Newage Publishing House, New Delhi.
4. Kahok, M.A. (2012), Illustrated Case Studies in Indian Management,
latest Edition, Everest Publishing House, New Delhi.
5. Mamoria, C.B. & V.S.P.Rao, (2012),Personnel Management, latest
Edition, HPH, India
6. Nick Wilton, (2012), An Introduction to Human Resource
Management, latest Edition, Sage India,
7. Rao, V S P (2014), Human resource Management Text and Cases,
latest Edition, Excel Books, India
8. Robert L Mathis, John H Jackson, Manas Ranjan Tripathy (2012),
Human Resource Management- A South Asian Perspective, latest
Edition, Cengage Learning, India
9. Seema Sanghi, (2012) Human Resource Management , latest
Edition, Macmillan, Chennai
10. Shyamkant Gokhale (2012),Personal Management, latest Edition,
Everest Publishing House, New Delhi.
WEB RESOURCES
1. Free Human Resources And Personnel Management Books

Download (freebookcentre.net)
2. 01. Human Resource Management author The Open University
of Hong Kong.pdf - Google Drive
3. human resource management - Bing video
4. pdf (free-ebooks.net)
On completion of this course, learners would be able to:

CLO1. Summarize the strategies, policies and systems for managing
people professionally in the context of rapidly evolving
aspirations of individuals and changing business scenarios.
CLO2. Recommend how the tasks of human resources planning, job
analysis, recruitment and selection can be executed. Also apply
the same in organizational context.
CLO3. Appraise various training methods and design a training
program.
CLO4. Evaluate the components of a compensation package, how to
structure them, and develop a company's compensation policy.
CLO5. Apply different labour laws for harmonious employee-
management relations.
CONTENTS
BLOCK/ CONTENTS PAGE

UNIT NO.
BLOCK 1 HUMAN RESOURCE MANAGEMENT - AN
INTRODUCTION
UNIT 1 INTRODUCTION TO HRM 2
1.1 Human Resource Management - Definition 3
1.2 Human Resource Management – Meaning 3
1.3 Department structure and Function 9
UNIT 2 MANAGERIAL AND OPERATING FUNCTIONS 14
2.1 Managerial Functions 15
2.2 Operational Functions 16
UNIT 3 HRM AS A PROFESSION 20
3.1 HRM as a Profession 21
3.2 Environmental Influence of HRM 21
3.3 Qualities of HR Managers 22
UNIT 4 HR AS A FACTOR OF COMPETITIVE 28
ADVANTAGE
4.1 Competitive Advantage 29
4.2 Benefits of competitive advantage 29
4.3 Evidence Linking HRM Practices to Competitive 30
Advantage
4.4 The Direct Impact of HRM Practices on 30
Competitive Advantage
4.5 Organization-Centered Outcomes Competitive 31
Advantage
4.6 HR strategies to gain a competitive advantage 31
BLOCK 2 HUMAN RESOURCE PLANNING,
RECRUITMENT & SELECTION
UNIT 5 HUMAN RESOURCE PLANNING 36
5.1 Human Resource Planning 38
5.2 Planning Process Steps 39
5.3 Building Resilience to the Dynamic Economic 39
Environment
5.4 Improving Operations in Human Resource 40
Planning Process
5.5 Adapt to Technology Changes 40
5.6 Enable Growth Phase for Small and Mid-Size 40
Businesses
5.7 Anticipating Changes in the Labour Market 41
5.8 Strategy consideration of Planning 41
5.9 The purpose of strategic planning 43
5.10 Important strategic planning issues to consider 43
UNIT 6 JOB ANALYSIS, JOB SPECIFICATION AND 46
JOB DESCRIPTION
6.1 Job Analysis 47
6.2 Job Specification 50
6.3 Job Description 53
6.4 Approaches to job design 54
6.5 Job simplification 56
6.6 Job Enlargement 57
6.7 Job Rotation 58
6.8 Job Enrichment 61
6.9 Difference between Job Enlargement and Job 63
Enrichment
UNIT 7 ABSENTEEISM AND LABOUR TURNOVER 67
7.1 Absenteeism and Labour Turnover 68
7.2 Turnover 69
7.3 Features of Employee Absenteeism 69
7.4 Labour turnover 70
7.5 Causes of labour Turnover 70
7.6 Measures to Control Employee Absenteeism 70
UNIT 8 RECRUITMENT AND SELECTION 73
8.1 Recruitment & Selection 74
8.2 Recruitment Policy 75
8.3 Factors affecting internal recruitment 77
8.4 Source of Recruitment 78
8.5 Recruitment Process in India 81
8.6 Selection 82
8.7 Placement and Induction 85
UNIT 9 DEMOTION AND SEPARATION 89
9.1 Demotion 90
9.2 Types of Demotion 90
9.3 Causes of Demotion 90
9.4 Separation 90
9.5 Types of Separation 91
BLOCK 3 TRAINING AND DEVELOPMENT
UNIT 10 TRAINING & DEVELOPMENT 95
10.1 Training & Development – Meaning 96
10.2 Steps in Training Programme 99
10.3 Evaluation of Training program 101
UNIT 11 MANAGEMENT DEVELOPMENT PROGRAMME 105
11.1 Concept of Management Development 106
Programme
11.2 The level-wise objectives of management 108
development
11.3 Characteristics of Management Development 109
Programme
11.4 Middle Functional Executive and Specialists 110
UNIT 12 TECHNIQUES OF TRAINING AND 113
DEVELOPMENT
12.1 Techniques of Training and Development 114
12.2 On the Job Training 116
12.3 The four techniques for on-the-job development 116
12.4 Off-the-Job Training 117
UNIT 13 STAGES OF CAREER DEVELOPMENT 123
13.1 Career Development 124
13.2 Steps in Career Development 125
13.3 Reasons for Career Development 126
13.4 Strategies for Career Development 128
13.5 Five stages in career development 131
BLOCK 4 PERFORMANCE APPRAISAL
UNIT 14 PERFORMANCE APPRAISAL 136
14.1 Performance Appraisal concept 137
14.2 Advantages of Performance Appraisal 150
14.3 Disadvantages of performance appraisal 151
UNIT 15 COMPENSATION 154
15.1 Compensation 154
15.2 Nature of compensation management 156
15.3 Compensation objectives 157
15.4 Major elements of components management 157
15.5 Importance of compensation management 158
15.6 Compensation Plan 160
UNIT 16 JOB EVALUATIONS 163
16.1 Job Evaluation 164
16.2 Job evaluation methods 165
16.3 Conducting Job Evaluations 166
16.4 Steps in Job Evaluations 167
UNIT 17 INCENTIVES, BONUS AND OTHER BENEFITS 171
TO EMPLOYEES
17.1 Incentives 172
17.2 The importance of incentives 173
17.3 Monetary or Financial Incentives 173
17.4 Non-Monetary/Non-Financial Incentives 175
17.5 Kinds of Incentives 176
17.6 Bonus 177
17.7 Types of Bonus Components 177
17.8 Importance of Bonus 179
17.9 Merits of Bonus 179
17.10 Demerits of Bonus 179
17.11 Fringe Benefits 179
17.12 Kinds of Fringe Benefits 183
17.13 ESOP (Employee Stock Ownership Plan) 183
17.14 Tax Implication of ESOPs 185
17.15 Benefits of ESOPs for the employers 186
17.16 ESOP and Other Forms of Employee Ownership 186
BLOCK 5 QUALITY OF WORK LIFE
UNIT 18 QUALITY OF WORK LIFE 191
18.1 Quality of Working life - Meaning 192
18.2 Issues in Quality of Working life 198
18.3 Enhancing quality of work life are 199
18.4 Obstacles in QWL 200
18.5 Quality Circles 201
18.6 Set up of Quality Circle 204
18.7 Characteristics of Quality Circle 206
18.9 Advantages of Quality Circles 207
UNIT 19 MANAGEMENT BY OBJECTIVES 211
19.1 Management by Objectives 212
19.2 Advantages and Disadvantages of Management 212
by Objectives
19.3 Steps in Management by Objectives Process 213
19.4 Benefits of Management by Objectives 215
19.5 Limitations of Management by Objectives 216
19.6 Talent Management 216
19.7 The importance of Talent Management 216
19.8 Competency Mapping 221
19.9 Building Competency Models 222
19.9 Methods of Competency Mapping 224
UNIT 20 EMPLOYEE PARTICIPATION IN 229
MANAGEMENT
20.1 Joint Consultation and Employee Participation in 230
Management Collective Bargaining
20.2 Objectives of workers participation in 232
management
20.3 Objectives of workers participation some common 232
objectives
20.4 Definition of collective bargaining 232
20.5 Forms of Collective Bargaining 233
20.6 Employees Participation 233
20.7 Characteristics of Workers Participation 234
20.8 The objective of WPM, as envisaged in the 234
Second Five Year Plan of India is to ensure
20.9 Levels of Participation 235
20.10 Benefits of Employee Participation 236
20.11 The success of worker’s participation in 238
management is limited due to the following factors
20.12 Workers’ Participation Management – Economic, 238
Psychological and Social Point of View
BLOCK 1
HUMAN RESOURCE MANAGEMENT - AN

INTRODUCTION
Unit 1: Introduction to HRM
Unit 2: Managerial and Operating Functions
Unit 3: HRM as a Profession
Unit 4: HR as a Factor of Competitive Advantage
1
UNIT 1
INTRODUCTION TO HRM
STRUCTURE
Overview
Learning Objectives
1.1 Human Resource Management - Definition
1.2 Human Resource Management – Meaning
1.2.1 Nature of HRM
1.2.2 Scope and Functions of HRM
1.2.3 Policy and Procedures and Function
1.3 Department structure and Function

1.3.1 Structure of Human Resource Management
1.3.2 Functions of Human Resource Management
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
HRM is the philosophy of people management based on the belief that
human resources are extremely important for sustained business
success. An organization acquires competitive advantage by using its
people effectively and utilizing their expertise to meet clearly defined
objectives. HRM is aimed at recruiting capable, flexible and committed
people. Managing and rewarding their performance and developing key
competencies. From this unit, you are going to learn about fundamental
of HRM
LEARNING OBJECTIVES

• Get knowledge on the concept of Human Resource Management
• discuss about the department function and structure
• discuss the managerial and operating function
• explore the environmental influence of HRM
2
1.1 HUMAN RESOURCE MANAGEMENT - DEFINITION
According to Flippo, “Human Resource /Personnel Management may be
defined as the planning, organizing, directing, and controlling of the
procurement, development, compensation, integration and maintenance
and separation of human resources to the end that individual,
organizational and societal objectives are accomplished”
The National Institute of Personal Management (NIPM) of India has
defined human resources – personal management as “that part of
management which is concerned with people at work and with their
relationship within an enterprise. Its aim is to bring together and develop
into an effective organization of the men and women who make up
enterprise and having regard for the well – being of the individuals and of
working groups, to enable them to make their best contribution to its
success”.
1.2 HUMAN RESOURCE MANAGEMENT – MEANING
Human Resource Management is the process of recruitment, selection of

employee, providing proper orientation and induction, providing proper
training and the developing skills, assessment of employee (performance
of appraisal), providing proper compensation and benefits, motivating,
maintaining proper relations with labor and with trade unions, maintaining
employee’s safety, welfare and health by complying with labor laws of
concern state or country.
1.2.1 Nature of HRM
1. HRM consists of people-related functions as hiring, training and
development, performance review, compensation, safety and
health, welfare, industrial relations and the like. These are typically
the functions of ‘Personnel Management’ and are administrative
and supportive in nature.
2. Human resource management necessitates alignment of HR
policies and practices with the organization’s strategies – both
corporate as well as functional. By meshing HR practices and
policies with strategies, the HR executive helps formulate and
implement business strategies making.
3. As stated above, human resource management involves the
application of management principles and functions to doables
and deliverables of people management.
4. Human resource management assumes that it is the people who
make the difference. They alone are capable of generating value
and adding to the competitive advantage to organizations.
3
5. HR activities, both doable and deliverable, are not the sole
responsibility of the HR specialists. Line managers are equally
responsible for carrying out the activities.
6. HR functions are not confined to business establishments only.
They are applicable to non-business organizations too, such as
education, health care and recreation activities.
1.2.2. Scope of HRM
1. Personnel aspect
• Human Resource Planning – It is the process by which the
organization identifies the number of jobs vacant.
• Job Analysis and Job Design – Job analysis is the systematic
process for gathering, documenting, and analyzing data about the
work required for a job. Job analysis is the procedure for identifying
those duties or behavior that defines a job.
• Recruitment and Selection – Recruitment is the process of
preparing advertisements on the basis of information collected
from job analysis and publishing it in a newspaper. Selection is the
process of choosing the best candidate among the candidates
applied for the job.
• Orientation and Induction – Making the selected candidate
informed about the organization’s background, culture, values and
work ethics.
• Training and Development – Training is provided to both new and
existing employees to improve their performance.
• Performance Appraisal – Performance check is done of every
employee by Human Resource Management. Promotions,
transfers, incentives, and salary increments are decided on the
basis of employee performance appraisal.
• Compensation Planning and Remuneration – It is the job of
Human Resource Management to plan compensation and
remuneration.
• Motivation – Human Resource Management tries to keep
employees motivated so that employees put their maximum effort
in work.
2. Welfare Aspect
• Human Resource Management have to follow certain health and
safety regulations for the benefit of employees. It deals with
working conditions, and amenities like - canteens, crèches, rest
and lunchrooms, housing, transport, medical assistance,
education, health and safety, recreation facilities, etc.
4
3. Industrial Relation Aspect
• HRM works to maintain co-ordinal relations with the union
members to avoid strikes or lockouts to ensure smooth functioning
of the organization. It also covers - joint consultation, collective
bargaining, grievance and disciplinary procedures and dispute
settlement.
1.2.3 Functions HRM
Human Resources management has an important role to play in
equipping organizations to meet the challenges of an expanding and
increasingly competitive sector. Increase in staff numbers, contractual
diversification and changes in demographic profile which compel the HR
managers to reconfigure the role and significance of human resources
management. The functions are responsive to current staffing needs but
can be proactive in reshaping organizational objectives. All the functions
of HRM are correlated with the core objectives of HRM. For example,
personal objectives is sought to be realized through functions like
remuneration, assessment etc.
Fig 1.1: Functions HRM
• Strategic HR Management: As a part of maintaining

organizational competitiveness, strategic planning for HR
effectiveness can be increased through the use of HR metrics and
HR technology. Human resource planning (HRP) function
determines the number and type of employees needed to
accomplish organizational goals. HRP includes creating venture
5
teams with a balanced skill-mix, recruiting the right people, and
voluntary team assignment. This function analyzes and
determines personnel needs in order to create effective innovation
teams. The basic HRP strategy is staffing and employee
development.
• Equal Employment Opportunity: Compliance with equal
employment opportunity (EEO) laws and regulations affects all
other HR activities.
• Staffing: The aim of staffing is to provide a sufficient supply of
qualified individuals to fill jobs in an organization. Job analysis,
recruitment and selection are the main functions under staffing.
Workers’ job design and job analysis laid the foundation for staffing
by identifying what diverse people do in their jobs and how they
are affected by them. Job analysis is the process of describing the
nature of a job and specifying the human requirements such as
knowledge, skills, and experience needed to perform the job. The
end result of job analysis is job description. Job description spells
out work duties and activities of employees. Through HR planning,
managers anticipate the future supply of and demand for
employees and the nature of workforce issues, including the
retention of employees. So HRP precedes the actual selection of
people for organization. These factors are used when recruiting
applicants for job openings.
The selection process is concerned with choosing qualified
individuals to fill those jobs. In the selection function, the most
qualified applicants are selected for hiring from among the
applicants based on the extent to which their abilities and skills
match the job.
• Talent Management and Development: Beginning with the
orientation of new employees, talent management and
development includes different types of training. Orientation is the
first step towards helping a new employee to adjust himself to the
new job and the employer. It is a method to acquaint new
employees with particular aspects of their new job, including pay
and benefit programmes, working hours and company rules and
expectations.
Training and Development programs provide useful means of
assuring that the employees are capable of performing their jobs at
acceptable levels and also more than that. All the organizations
provide training for new and experienced employees. In addition,
6
organizations often provide both on the job and off the job training
programmes for those employees whose jobs are undergoing change.
HR development and succession planning of employees and managers
is necessary to prepare for future challenges. Career planning has
developed as result of the desire of many employees to grow in their jobs
and to advance in their career. Career planning activities include
assessing an individual employee’s potential for growth and advancement
in the organization.
Performance appraisal includes encouraging risk taking, demanding
innovation, generating or adopting new tasks, peer evaluation, frequent
evaluations, and auditing innovation processes.
This function monitors employee performance to ensure that it is at
acceptable levels. This strategy appraises individual and team
performance so that there is a link between individual innovativeness and
company profitability. Assigned tasks should be appraised and who
should assess employees’ performance are also taken into account.
• Total Rewards: Compensation in the form of pay, incentives and
benefits are the rewards given to the employees for performing
organizational work. Compensation management is the method
for determining how much employees should be paid for
performing certain jobs.
Compensation affects staffing in that people are generally
attracted to organizations offering a higher level of pay in
exchange for the work performed. To be competitive, employers
develop and refine their basic compensation systems and may use
variable pay programs such as incentive rewards, promotion from
within the team, recognition rewards, balancing team and
individual rewards etc. This function uses rewards to motivate
personnel to achieve an organization’s goals of productivity,
innovation and profitability. Compensation is also related to
employee development in that it provides an important incentive in
motivating employees to higher levels of job performance to higher
paying jobs in the organization.
Benefits are another form of compensation to employees other
than direct pay for the work performed. Benefits include both
legally required items and those offered at employer’s discretion.
Benefits are primarily related to the area of employee maintenance
as they provide for many basic employee needs.
• Risk Management and Worker Protection: HRM addresses
various workplace risks to ensure protection of workers by meeting
7
legal requirements and being more responsive to concerns for
workplace health and safety along with disaster and recovery
planning.
• Employee and Labor Relations: The relationship between
managers and their employees must be handled legally and
effectively. Employer and employee rights must be addressed. It
is important to develop, communicate, and update HR policies and
procedures so that managers and employees alike know what is
expected. In some organizations, union/management relations
must be addressed as well.
The term labor relation refers to the interaction with employees who are
represented by a trade union. Unions are an organization of employees
who join together to obtain more voice in decisions affecting wages,
benefits, working conditions and other aspects of employment. With
regard to labor relations the major function of HR personnel includes
negotiating with the unions regarding wages, service conditions and
resolving disputes and grievances.
1.2.3 policy and procedures of the HRM
Internal policies and procedures impact HR activities. For example, if the

company is committed to promoting from within, HR must ensure
employees receive appropriate training and development to be ready for
promotion when the time comes. HR should monitor the number of
employees eligible for retirement and ensure potential replacements or
other staff members are trained to avoid a sudden departure of business
knowledge.
If the company is unionized, HR must engage in collective bargaining with
the union on matters of representation. External influences, political
factors and organizational culture all influence the amount of grievances
and complaints HR must respond to.
Policy can be defined
A plan and a high-level statement which formally briefs with an inclusion
of the organizational goals, general benefits, acceptable procedures, and
objectives to certain area of subject is a known as a policy. It always
specifies the action that is required and also defines standard pointer, and
they also have a few elements for example
1. Requirement of compliance is mandatory
2. Disciplinary action that needs to be taken against failure to comply
these policies
3. Desired results need to be focused and how to implement
8
4. Set standard guidelines need to be specified and defined
appropriately.
Definition of Procedures
Procedures define a process, and the process states what job is going to
be performed by whom? When does the job need to be performed and
what are the criteria of performing the job? These procedures can either
be put down on a process manual and outlined or can be written down in
text. Procedures include a step-by-step accomplishment towards the end
goal of the job to be performed. Procedures are machines in the form of
text to enforce the policy and a way of protecting resources. It’s a guide
to refer to at the time of any crises in the organization. Helps in abolishing
problems in one single instinct can also be called as SOP or Standard
Operating Procedures.
1.2.4. Importance of policy and procedures of an organization
• The process of selecting and recruiting an employee
• Process of giving equal opportunities policy
• Safeguarding the employee’s self-respect at work policy
• Procedures of discipline and injustices
• Procedures of safety of the employee
• Code of conduct
• Procedure of managing the employee leaves
• Policies for family
• Retirement pays and pension policies
• Statutory policy
1.2.5. Policies that can be good for the organization
• Responsibilities of the board
• Investment and reserve police
• Money laundering policies
• Performance and appraisal procedures
• Whistle blower policy
• Mail and internet usage policy
• Expenses policy
• Risk management policy
• Work flexibility policy
• Career break policy
1.3 DEPARTMENT STRUCTURE AND FUNCTIONS
Human resource departments are often organized along functions and

may be hierarchical in nature. Common units in human resource
departments include recruiting, training and development, compensation
9
and benefits administration, health and safety and employee and labor
relations.
Fig 1.2 Structure of human resource management
1.3.2. Functions of Human Resource Management

1) Recruiting and staffing
Human resources departments manage recruiting and staffing. They
make sure the company has enough employees to run the business
and fill vacancies. They also prepare and implement recruiting
procedures to ensure they hire the right personnel. They create job
descriptions, advertise jobs and conduct interviews and background
checks. Their objective is to find people who have the necessary
skills to complete the job and who also fit the company’s culture.
2) Health and safety
HR considers the health and safety of employees a priority. This
department researches and develops health and safety procedures
in compliance with laws and regulations. The organization can offer
health and safety training to its employees or recommend
appropriate clothing and equipment.
10
3) Training and development
The HR training unit develops a continuous training program for the
company’s employees to ensure their education and skills are
current. Whether it is a course on new technologies or leadership
training for supervisors, the training and development department
provides access to materials for all employees. It coordinates with
the compensation and benefits unit to reimburse the costs of
external training that employees sometimes pay.
4) Compensation and benefits
This unit manages payroll, payroll tax administration and benefits
administration. A good compensation and benefits package can
make the difference when a company tries to hire the right
candidate. They organize wages, insurance, scheduling and other
perks for employees. Human resources aim to meet employees’
needs while maintaining fairness and consistency in the
organization. With this objective, the compensation and benefits
department explore, proposes and manages new benefit options for
employees.
5) Labour and employee relations

Employees can turn to the labour and employee relations
department when they have concerns and trust that necessary
actions will take place. For example, if an employee has issues
communicating with management or a conflict with another
employee, HR will mediate and find solutions. Two approaches to
personnel departments Although similar, some differences between
a personnel department and a human resources department exist.
6) Personnel department
A personnel department is an administrative function in an
organization that provides the required staff to the organization and
manages personnel relationships at a low level. Here is how it
approaches different areas of employment
LET US SUM UP
Human resource management (HRM) is the process of employing people,
training them, compensating them, developing policies relating to them,
and developing strategies to retain them. As a field, HRM has undergone
many changes over the last twenty years, giving it an even more important
role in today's organizations.
11
Human Resource Management (HRM) is a collective term for all the
formal systems created to help in managing employees and other
stakeholders within a company. Human resource management is tasked
with three main functions, namely, the recruitment and compensation of
employees, and designating work. Within the unit of each organization,
the objectives of HRM are to help the organization achieve its goals by
providing and maintaining productive employees. Efficiently make use of
the skills and abilities of each employee. Make sure employees have or
receive the proper training.
One of the most important functions of human resource management
is developing the skills and expertise of its people. This can include setting
up training sessions, facilitating workshops, and acquiring new equipment
or technology. You have learnt about the basic concepts and evolution of
HRM
CHECK YOUR PROGRESS

1. Human resource management emphasis
a) Development of people
b) Punishment of people
c) Adoption of people
d) None of these
2. Basic managerial functions of HRM are
a) Planning, organising, staffing
b) Planning, organising and co-ordinating
c) Planning, organising, directing and controlling
d) None of these
3. Which of the following statements is/are correct?
a) HRM is a strategic management function
b) Under HRM employee is treated as resource
c) HRM is the management of skills, talent and abilities
d) HRM lacks the organisation to achieve its goals
4. Following are the characteristics of HRM except
a) Pervasive function
b) Interdisciplinary function
c) Integrating mechanism
d) Job oriented
12
GLOSSARY
Risk : HR risk management focuses on analyzing the

Management risks that employees of an organization pose to
the business.
Reward : 'Reward system refers to all the monetary, non-

monetary and psychological payments that an
organisation provides for its employees in
exchange for the work they
Reward : perform.
Talent : Talent management is how employers recruit

Management and develop a workforce that is as productive
as possible and likely to stay with their
organization long term.
WEB RESOURCES
1. INTRODUCTION INTO HUMAN RESOURCES MANAGEMENT -
LECTURE 01 - Bing video
2. Introduction to Human Resource Management - Bing video
3. Introduction to HRM - Bing video
4. Introduction to Human Resource Management - Bing video
SUGGESTED READINGS
1. Anjali Ghanekar, (2010), “Essentials of Human Resource
Management”, latest Edition, Everest Publishing House, New Delhi.
2. Robert N. Lussier, John R. Hendon · (2017), Human Resource
Management Functions and Applications. Sage Publications.
1. a) 2. c) 3. b) 4. d)
13
UNIT 2
MANAGERIAL AND OPERATING
FUNCTIONS
STRUCTURE
Overview
Learning Objectives
2.1 Managerial Functions
2.1.1. Planning
2.1.2 Organising
2.1.3 Staffing
2.1.4 Directing
2.1.5 Controlling
2.2 Operational Functions
2.2.1 Procurement
2.2.2 Job analysis and design
2.2.3 Human resource planning
2.2.4 Recruitment
2.2.5 Selection
Let Us sum up
Check your progress
Glossary
Suggested readings

OVERVIEW
Human Resource or Personnel Department is established in most of the
organisations, under the charge of an executive known as Human
Resource/Personnel Manager. This department plays an important role in
the efficient management of human resources. In this unit, you will learn
about the various functions of HRM in terms of managerial and operating
functions.
14
LEARNING OBJECTIVES
After completing this unit, you will be able to:
• Gain knowledge on Managerial functions of HR
• Describe the Planning Functions in the Organizations
• learn the importance of job analysis and design
• examine the HRM as Profession
2.1 MANAGERIAL FUNCTIONS
HRM Managerial Function Includes:
• Planning
• Organizing
• Directing
• Controlling
2.1.1. Planning Functions
To get things done through the subordinates, a manager must plan ahead.
Planning is necessary to determine the goals of the organisation and lay
down policies and procedures to reach the goals. For a human resource
manager, planning means the determination of personnel programs that
will contribute to the goals of the enterprise, i.e., anticipating vacancies,
planning job requirements, job descriptions and determination of the
sources of recruitment.
2.1.2. Organising
Grouping of personnel activity logically into functions or positions.
• Assignment of different functions to different individuals.
• Delegation of authority according to the tasks assigned and
responsibilities involved.
• Co-ordination of activities of different individuals.
2.1.3. Directing
The plans are to be pure into effect by people. But how smoothly the plans
are implemented depends on the motivation of people. The direction
function of the personnel manager involves encouraging people to work
willingly and effectively for the goals of the enterprise.
2.1.4. Controlling
Controlling is concerned with the regulation of activities in accordance with
the plans, which in turn have been formulated on the basis of the
objectives of the organization. Thus, controlling completes the cycle and
leads back to planning. It involves the observation and comparison of
results with the standards and correction of deviations that may occur.
15
2.2. OPERATIONAL FUNCTIONS
2.2.1. Procurement
This deals with requirement of manpower, their recruitment, selection and
placement.
It is concerned with the obtaining of proper kind and right number of
personnel at the right time and at the most economical rates so that the
organisational goals could be easily accomplished. It deals especially with
subjects such as HRP, job analysis, recruitment and selection, induction,
and placement.
2.2.2 Job analysis and design
Job design refers to the process of putting together various elements to
form a job, organizational and individual worker requirements as well as
health, safety and ergonomics considerations. Training helps the
employees to perform all parts of these jobs and give them the authority
and accountability to do.
2.2.3 Human resource planning

The planning functions of the human resource department pertain to the
steps taken in determining in advance personnel requirements, personnel
programmes, policies etc. After determining how many and what type of
people are required, a personnel manager has to devise ways and means
to motivate them.
2.2.4 Recruitment
It is the process of searching for prospective employees and stimulating
them to apply for jobs in the organization. This includes identifying the
sources of prospective applicants, creation of new sources of prospective
employees, stimulating the personnel to apply for the posts. Here the
organization has to consider the prospective personnel available in the
organization itself and promote them to a higher level, which will create
regard in the minds of the employees, and it acts as a means of
motivation.
2.2.5 Selection
It is the process of comparing the qualities such as qualification, skill, and
job knowledge of the applicant and compares them with job specification
to appraise the suitability of the candidate for the job. This function
includes – Designing and developing the blank application forms, inviting
application from prospective candidates, scrutinizing the application
forms, preparing the list of prospective applicants, designing the
appropriate testing and interviewing techniques, arranging interviews,
16
conducting interviews and preparing the list of successful applicants,
sending appointment letters.
LET US SUM UP
Quality managers really discover how to master the five basic functions:
planning, organizing, staffing, leading, controlling. And this step literally
fits into other various departments of an organization. Human Resource
like for example too follows the similar steps to execute their
functions. The human resources department of an organization functions
with Human Resource Management. The department checks various
aspects of employment, such as working in compliance with the labour
law and following the employment standards, taking care of the benefits
of the employees and other aspects of recruitment and employee
offboarding.
Human resources are the combined set of the people who together form
the workforce of a particular organization. Hyman capital is embodied as
a narrower concept merely meaning the knowledge possessed by the
individual working, while Human Resource is a much-widened concept.
Similar terms are manpower, labour, personnel, associates or simply
people all are related to the term Human Resource.
HR management bridges the gap between the employees’ performance
and the organisation’s strategic objectives, whether long or short term.
Human resource management contributes to the remarkable success of
an organisation. Thus, human resource management has emerged as a
popular course to study. You have learnt the various functions of HRM.
CHECK YOUR PROGRESS
1. Which of the following evolved in staffing?
a) Termination
b) Estimation of workload
c) Personnel appointments and placements
d) All of the above

2. Human Resource Management is …?
a) Employer oriented
b) Employee oriented
c) Legally oriented
17
3. Which of the following factor does not involve in communication with
employees?
a) Compensating
b) Disciplining
c) Counselling
d) interviewing
4. The following type of recruitment process is said to be a costly affair.
a) External recruitment
b) Internal recruitment
c) Cost remains the same for both types
GLOSSARY
Managerial : All such functions which are inherently

Functions supervisory in nature and are bestowed with
powers and authority to take all policy and
administrative decision in an organisation.
Operational : Operations Functions means all operating

Functions duties directly connected with the delivery of
passenger services to the public.
Procurement : Procurement specialises in contracting across

the supply chain, managing vendors and
overseeing their success.
Job analysis : Job analysis refers to a systematic process of

collecting all information about a specific job,
including skill requirements, roles,
responsibilities.
SUGGESTED READINGS
1. Robert N. Lussier, John R. Hendon · (2017), Human Resource
Management Functions and Applications. Sage Publications.
2. Paul Banfield, Rebecca Kay (2012), Introduction to Human Resource
Management, Oxford University Press.
18
3. John P. Wilson · (2005), Human Resource Development: Learning &
Training,
WEB RESOURCES
1. https://medium.com/@swaticbindia/human-resource-
management-its-core-functions-managerial-operative-
fc0335ef616a
2. https://www.planettogether.com/blog/functions-of-operations-
management
3. https://asana.com/resources/functions-of-operation-management
1. d) 2. b) 3. a) 4. a)
19
UNIT 3
HRM AS A PROFESSION
STRUCTURE
Overview
Learning Objectives
3.1 HRM as a Profession
3.1.1. Carrier Opportunities in Human Resource Management
3.2.2. Functions and Carriers within Human Resource

Management
3.2 Environmental Influence of HRM
3.2.1. Internal Environment
3.2.2. External Environment
3.3 Qualities of HR Managers
Let Us sum up
Check your progress
Glossary
Suggested readings
Answer to check your progress.
OVERVIEW
Human resources management is the practice of identifying, allocating

and coordinating the human capital needs of an organization. It includes
hiring, compensating, training, developing and retaining an organization's
employees. The efforts of HRM occupational leaders to embrace the label
of professionalism has therefore required them to rethink the nature of “a
profession” to produce a new concept of professionalism which
incorporates a primary commitment to the interests of employing
organizations. In this unit, you will study the HRM is a profession for which
various qualities of HR managers and its managerial roles is to be exhibit.
LEARNING OBJECTIVES
After completing this Unit, you will be able to:
• Gain knowledge on meaning of HRM as a Profession
• Discuss the carrier opportunities in HR
• learn the environmental influence of HRM
20
• examine the qualities of HR Manager.
3.1 HRM AS A PROFESSION
Human resources (HR) or talent management, as HR is increasingly
referred to, is a profession that consistently ranks high on lists of best
careers.
3.1.1 Carrier Opportunities in Human Resource Management
• HR Generalist
• HR recruiter
• HR specialist
• Compensation Manager
• Training and Development Manager
3.1.2 Functions and Carriers within Human Resource Management
• Recruitment and Hiring
• Onboarding and ongoing training and development
• Managing employee and employer relationships
• Creating disciplinary action
3.2 ENVIRONMENTAL INFLUENCE OF HRM
The environment comprises all those forces which have their bearing on
the functioning of various activities including human resource activities.
Environment scanning helps HR managers become proactive to the
environment which is characterized by change and intense competition.
Human resource management is performed in two types of environments-
internal and external.
3.2.1 Internal Environment
These are the forces internal to an organisation. Internal forces have
profound influence on HR functions. The internal environment of HRM
consists of unions, organizational culture and conflict, professional
bodies, organisational objectives, polices, etc. A brief mention of these
follows.
a. unions: Trade unions are formed to safeguard the interest of their
members/workers. HR activities like recruitment, selection,
training, compensation, industrial relations and separations are
carried out in consultation with trade union leaders.
b. Organizational Culture and Conflict: As individuals have
personality, organizations have cultures. Each organisation has its
own culture that distinguishes one organisation from another.
Culture may be understood as sharing of some core values or
beliefs by the members of the organisation “Value for time” are the
21
culture of Reliance Industries Limited. The culture of Tata
conglomerate is “get the best people and set them free”. HR
practices need to be implemented so that best fit the organisation’s
culture. There is often conflict between organizational culture and
employee’s attitude.
Conflict usually surfaces because of dualities such as personal
goal vs. organisational goal, discipline vs. autonomy, rights vs.
duties, etc. Such conflicts have their bearings on HR activities in
an organisation.
c) Professional Bodies: Professional bodies, the NIPM as the HR
professional body regulates the functions of HR practitioners in
India. For this the NIPM in of ethics which the HR practitioners are
expected to declare their allegiance to the code. Thus,
professional bodies also influence HR functions of an organization.
3.2.2 External Environment
The external environment includes forces like economic, political,
technological, demographic etc. These exert considerable influence on
HRM. Each of these external forces is examined here.
a) Economic: Economic forces include growth rate and strategy,

industrial production, national and per capita incomes, money and
capital markets, competitions, industrial labor and globalization. All
these forces have a significant influence on wage and salary levels.
Growing unemployment and reservation in employment also affect
the choice for recruitment and selection of employees in
organizations.
b) Political: Political environment covers the impact of political
institutions on HRM practices. For example, democratic political
system increases the expectations of workers for their wellbeing.
3.3 QUALITIES OF HR MANAGER
1. Intelligence
The HR Manager should be enough intelligent to understand the situation
and react on it. He should be so intelligent that he must be capable of
judging the situation without depending on others.
22
2. Emotional Stability
HR manager should be emotionally stable. He should not loose temper
and he should not be moody. Moodiness, short temper, inconsistency are
the enemies of HR manager. He should be confident and objective in his
approach. Whatever he does should be based on the facts and
information that he collects and not on the rumor.
3. Communication Skill
A manager must have good communication skills with a good command
of the language he is using. The ability to express yourself clearly, explain
the policies and programmes precisely and convince others quickly are
the important qualities of good communication and HR manager should
possess all these qualities.
4. Motivational Skill
HR manager must have the qualities to motivate his subordinates. He
should encourage and inspire his people by highlighting their positive
nature. This requires study of his subordinates and understanding their
requirements.
5. Analytical Skill
The HR Manager must be capable of analyzing the problem scientifically

and solving it quickly. He must be able to differentiate the “right and
“wrong”, “important” and “un-important” and should have the ability to
judge accurately.
6. Leadership Skill
HR manager must have good leadership qualities to lead the entire team
of an organization. He should have qualities to win the confidence of all of
his subordinates. For this purpose, he must be unbiased, impartial and
firm in his dealings. He should have physical fitness, moral courage and
above all he must be sincere, loyal, regular and honest in his duties.
Job Related Qualities
1. Technical Knowledge or Quality
HR Must have technical knowledge of the field or discipline relevant for
human resource management. He must have thorough knowledge of
concepts, principles and theories of human resource management and he
must be able to apply these theories and principles into practice. He
should have the minimum knowledge of the product which his company
is producing, and he should be aware of general law, constitution &
23
government policy towards labour and general economic conditions
prevailing in the country.
2. Training & Experience
HR manager must be well trained in industrial relations, industrial
psychology and labor legislation so that he can carry out his work with
confidence and zeal. Training and knowledge on these areas help him to
maintain good relationship with his subordinates who in turn help him to
carry out his duties smoothly and satisfactorily.
3. Educational Qualification
HR is able to discharge his duties successfully, he should be well qualified
in the discipline of HR management and other relevant discipline. He must
be basically graduate in any discipline and post Graduate or Diploma with
a specialization in HRM, MBA with HRM or MA in Sociology or social work
or M.Com with HRM and degree in law will be an added qualification to
become a successful HR manager.
HR as a factor of Competitive Advantage

• A traditional source of competitive advantage has been eroded. Now
it is believed that productivity is through people. People provide an
organization with a source of competitive advantage. Various studies
have concluded that an organization’s human resources can be a
significant source of competitive advantage.
• The human factor is the only organizational resource that can
develop a competitive advantage. Porter argues that people are
becoming a great differentiating factor. Managers should select
those people who are smarter, better trained, more motivated, and
more committed.
• Jeffry Pfeffer, in his famous book “Human equation,” argues that the
source of competitive advantage has shifted over time. Successful
companies of the USA for their sustained advantage tend to rely not
on technology, patents, or strategic position, but on the way they
manage their workforce.
• Achieving competitive success through people requires a basic
change in how managers think about their employees and how they
view the working relationship. For gaining competitive advantage
through people,
• Porter argues that people are becoming a great differentiating factor.
Managers should select those people who are smarter, better
trained, more motivated, and more committed. Jeffry Pfeffer, in his
24
famous book “Human equation,” argues that the source of
competitive advantage has shifted over time.
• Successful companies of the USA for their sustained advantage tend
to rely not on technology, patents, or strategic position, but on the
way, they manage their workforce. Achieving competitive success
through people requires a basic change in how managers think about
their employees and how they view the working relationship. For
gaining competitive advantage through people,
Professor Pfeffer of Harvard University suggested few HRM guidelines,
and these are listed below:
• Employment security.
• Selective recruiting.
• High and lucrative wages.
• Incentive pays.
• Employee ownership.
• Employee empowerment and participation.
• Information sharing.
• Training and development of skills.
• Treat people with respect and dignity.
• Wage compression.
• Promotion from within.
LET US SUM UP
HRM is concerned with getting better results with the collaboration of
people. It is an integral but distinctive part of management, concerned with
people at work and their relationships within the enterprise. HRM helps in
attaining maximum individual development, desirable working relationship
between employees and employers, employees and employees, and
effective modeling of human resources as contrasted with physical
resources. It is the recruitment, selection, development, utilization,
compensation and motivation of human resources by the organization.
From this unit, you have learnt the quality and role of HR Managers and
his role in the organisations.
CHECK YOUR PROGRESS

1. Which of the following is the correct abbreviation of HRM?
a) Human Resource Management
b) Human Resourcefulness Management
c) Human Relation Management
d) Humanistic Relation Management
25
2. Which of the following correctly defines the Human Resource
Department?
a) Functional department
b) Service department
c) Line department
d) Authority department
3. Human factor can be defined as __________
a) The entire concept of human behavior
b) Interrelated Physiological, Psychological and Socio-ethical
aspects of a human being.
c) Micro and macro issues of socioeconomic factor
4. Human relation approach refers to __________
a) An approach in which workers are facilitated with humanity at the
workplace.
b) A shared teamwork between the employee and the employer for
solving problematic issues.
c) Forming a group of people on the work front so as to inspire them
to work collectively for the company's growth in terms of social,
economic, and psychological productivity.
GLOSSARY
Human Resource is concerned with getting better results with

Management the collaboration of people
;
Procurement : deals with requirement of manpower, their

recruitment, selection and Placement
Employee and Labor : The relationship between managers and

Relations their employees must be handled legally
and effectively
SUGGESTED READINGS
Management”, latest Edition, Everest Publishing House, New
Delhi
26
2. Aswathappa,K (2011) “Human Resource Management, Text and
Cases”, latest Edition, TMH, India.
3. Indranil Mutsuddi, (2011), “Essentials of Human Resource
Management”, latest Edition, Newage Publishing House, New
Delhi.
4. Kahok, M.A. (2012), Illustrated Case Studies in Indian
Management, latest Edition, Everest Publishing House, New
Delhi.
5. Mamoria, C.B. & V.S.P.Rao, (2012),Personnel Management,
latest Edition, HPH, India.
WEB RESOURCES
1. HRM Lecture 1 Introduction to Human Resource Management -
Bing video
2. HRM in Tamil (Part 1) | Human Resource Management Course |
Definitions and Characteristics 1 - Bing video
3. Introduction to Human Resource Management (HRM Lecture 1) In
English - YouTube
1. a) 2. b) 3. b) 4. c)
27
UNIT 4
HR AS A FACTOR OF COMPETITIVE
ADVANTAGE
STRUCTURE
Overview
Learning Objectives
4.1 Competitive Advantage
4.1.1 HR strategies to gain competitive advantage
4.2 Benefits of competitive advantage
4.3 Evidence Linking HRM Practices to Competitive Advantage
4.4 The Direct Impact of HRM Practices on Competitive
Advantage
4.5 Organization-Centered Outcomes Competitive Advantage
4.6 HR strategies to gain a competitive advantage
4.6.1 Maximizing and Optimizing Operations

4.6.2 Developing innovation as a competitive edge.
Let Us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Competitive advantage means positioning your organization in front of
different organizations in order to achieve prevalence in quality, low cost,
worth, or innovation. No matter what this means to a company, it might be
the only key to success, business growth, and financial stability. In this
unit, you are going to learn about competitive advantages and HR factors,
In order to provide a strong competitive advantage for the organization,
HRs need to develop a certain Human Resources competitive advantage
strategy that would meet the requirements of efficient management. A
thorough, well-developed HR strategy is an advantage that is tough to
beat.
28
LEARNING OBJECTIVES
• get knowledge HR competitive advantage
• examine the importance HR strategy towards competitive
advantage
• study the benefits of competitive advantage
• discuss the developing innovation as a competitive edge
4.1 COMPETITIVE ADVANTAGE
To succeed, an organization must gain and maintain an edge over its
competitors—that is, a firm must develop a competitive advantage or
superior marketplace position relative to its competition. Firms can
accomplish this aim in one of two ways: through cost leadership or product
differentiation. Under a cost leadership strategy, a firm provides the same
services or products as its competitors but produces them at a lower cost.
By doing so, the organization earns a better return on its investment in
capital and human resources. For example, Restaurants A and B sell the
same number of hamburgers at the same price.
The HRM practices of an organization can be an important source of
competitive advantage. As we shall see, effective HRM practices can
enhance a firm’s competitive advantage by creating both cost leadership
and product differentiation. In the following paragraphs, we document this
assertion with evidence derived from research and expert opinion. We
then provide a model that attempts to explain why HRM practices can
have such a dramatic impact on competitive advantage.
4.1.1. HR strategies to gain competitive advantage
Organizations that have come up with a thought-through and reasonable
Human Resource competitive advantage strategy have a great advantage
over competitors. Proper and efficient human capital management brings
shocking results: employees enjoy working for the company if they feel
supported and empowered.
Every organization has individual business goals which contribute to
developing a CA strategy. Your HR strategy should also be developed to
achieve these goals by attracting and retaining workers with specific
benefits that support competitive strategies.
4.2. BENEFITS OF COMPETITIVE ADVANTAGE
• Employee empowerment and participation
• Employment security
29
• Selective recruiting
• Incentive pays
• Support and respect from the management
• High competitive wages
• Wage compression
• Employee ownership
• Independence
• Information sharing
• Training and development of skills
• Promotion
4.3. EVIDENCE LINKING HRM PRACTICES TO COMPETITIVE
ADVANTAGE
A growing body of research-based evidence indicates that a firm’s HRM

practices can have a rather strong impact on competitive advantage. A
growing number of studies have been published that link specific HR
practices to profits. As noted by Shari Caudron, “Not only are executives
beginning to understand that the human resource is the most valuable
resource they have, but there’s also proof available now to show that
investment in human resources does pay off linking specific HRM
practices to competitive advantage are noted throughout this text. Here
we report the results of three studies that examined the impact of the
entire set of HRM practices used by various companies. One study
examined the HRM practices and productivity levels of 968 firms across
35 industries 11 The effectiveness of each company’s set of HRM
practices was rated based on the presence of such things as incentive
plans, employee grievance systems, formal performance appraisal
systems, and worker participation in decision making. The study
uncovered a strong link between HRM effectiveness and productivity:
Specifically, companies with high HRM effectiveness ratings were five
percent more productive than companies with average HRM ratings.
4.4. THE DIRECT IMPACT OF HRM PRACTICES ON COMPETITIVE
ADVANTAGE
In some instances, firms can achieve cost leadership through the use of
effective HRM practices. HRM-related costs associated with recruitment,
selection, training, compensation, and so forth comprise a significant
portion of a firm’s expenditures. These costs are especially high in
30
service-related industries, where firms spend about 70 percent of their
budgets on payroll costs alone. These HRM-related costs can vary
Significantly from competitor to competitor. Those doing the best job of
containing them, therefore, stand to gain a financial advantage over their
competitors.
4.5 ORGANIZATION-CENTERED OUTCOMES COMPETITIVE
ADVANTAGE
When organization-centered outcomes are favorable, competitive
advantage is usually achieved. We first examine the impact of these
outcomes on cost leadership and then on product differentiation. As noted
earlier, cost leadership can be achieved by increasing the size of the ratio.
Number of units produced/Total cost of production When firms can
increase their quantity of output through effective HRM practices, their per
unit costs are lowered. For example, let’s say that, in a given year, a
production worker earned $20,000 while producing 1,000 units. The labor
cost would thus be $20 ($20,000/1,000) per unit. If the firm can motivate
this worker to increase his or her productivity to 1,500 units, the per unit
cost of production would be reduced from $20 to $13.33 ($20,000/1,500).
One of the most common ways of cutting HRM costs is to employ

technology to replace some of the more expensive HR professional-
delivered services. For instance, rather than conducting classroom-
training sessions, companies are using e-learning to deliver programs.
Expensive employee handbooks are now being put online.
Replacement costs include recruiting, selecting, and training new
employees, and they can be quite high, typically ranging from $3,300 to
$6,300.27 In some cases, they can be much higher. For instance, it costs
one company $418,000 to replace a single executive 28 Firms that do a
good job of retaining employees can often reap an additional benefit—
better customer retention. Customers prefer doing business with firms that
have a stable workforce. This notion was confirmed in a study of 17
insurance companies that compared the customer retention rates of
companies with low and high employee turnover. Firms with low turnover
retained 10 percent more of their customers, a difference that has a
financial value of $300 million for a typical insurance company
4.6 HR STRATEGIES TO GAIN A COMPETITIVE ADVANTAGE
Each company has different business objectives that contribute to
developing a competitive advantage. HR strategies should be developed
to achieve these objectives. Business Growth. If you are planning to
31
expand your business, you most likely will need additional employees
therefore establishing a workforce plan is necessary to ensure you are
able to hire the right employees in the time in which you need them.
Developing a workforce plan involves forecasting how long it will take to
hire the employee, where you will source your applicants and when you
need to begin the recruiting process. Failure to implement this strategy
could interfere with your ability to scale your business according to your
plan and most likely the quality of your services and products will suffer.
4.6.1 Maximizing and Optimizing Operations
Whether your goal is to achieve quality, quantity, or efficiency, ensuring
you have the right people in the right positions is critical for achieving
business operations goals that are linked to profitability. In addition, a
workforce plan can accomplish this objective. Workforce planning also
includes conducting an inventory of your current talent and identifying
gaps in technical skills that relate to the areas of importance. Once these
gaps have been identified, then create a plan to either develop employees
within your organization or hire from the outside to minimize the gaps.
In addition to the technical aspects of human capital, developing a
competitive edge means selecting and retaining employees with specific
traits and behaviors that support competitive strategies.
When recruiting and selecting employees, these traits should be
evaluated on applicants as part of your selection process. For existing
employees, these traits can be developed in a company culture where
management supports intrepreneurship and innovation.
4.6.2. Developing innovation as a competitive edge
Developing innovation is fostered in a company culture that provides
opportunities that support intrepreneurship. Intrepreneurship is the
concept that your employees have the resources and abilities to solve the
company problems that lead to increased productivity and profitability
within your company.
One way to develop a company culture that fosters intrepreneurship is to
allow employees from all levels of the organization to solve problems in
either a group setting or individually. As part of this initiative, managers
must understand that failure is part of the process. Managers that allow
employees to fail and look at failure as opportunities for growth will yield
better results.
Developing opportunities that encourage creativity can serve as a

platform for managers to engage with their employees in this environment.
32
A work environment that fosters intrapreneurship and innovation typically
has a high level of employee engagement. High employee engagement
will lead to high employee retention and increased productivity, which
leads to profitability.
At the end of the day, your people are your competitive edge. They are
the ones interfacing with your customers and producing your products and
services. They are generating new ideas and solving problems. They
represent your quality, value and innovation. Make sure you have specific
HR strategies to attract, develop and retain the human capital you need
to be competitive.
LET US SUM UP
You have learnt about the competitive advantages that are attributed to a
variety of factors including cost structure, branding, the quality of product
offerings, the distribution network, intellectual property, and customer
service. The four primary methods of gaining a competitive advantage
are cost leadership, differentiation, defensive strategies and strategic
alliances. There are four types of competitive environment: pure
competition, monopolistic competition, oligopoly and monopoly. Porter's
Five Forces and SWOT Analysis are the most common ways to analyze
the competitive environment of a company.
CHECK YOUR PROGRESS

1. The “balanced scorecard” supplies top managers with a ___________
view of the business.
a) long-term financial
b) detailed and complex
c) simple and routine
d) fast but comprehensive
2. People cast in the role of contributors to production are called __
a) Capitalist
b) Landowners
c) Human Resources
d) Consumers
3. The competencies or skills that a firm employs to transform inputs into
outputs are
a) tangible resources
b) intangible resources
33
c) organizational capabilities
d) reputation resources
4. Which of the following techniques are not connected with human
resource planning?
a) succession planning
b) management of change
c) simple linear regression
d) Markov matrix analysis
5. Which activities are not associated with workforce planning?
a) Forward planning reviewing internal and external labour supply
b) Assessing capability of workforce to develop any requisite skills
c) Time keeping
d) Identifying areas where recruitment will be needed
GLOSSARY
Competitive : factors that allow a company to produce goods

Advantages or services better or more cheaply than its
rivals.
Succession : succession planning involves preparation

Planning rather than pre-selection
innovation : Innovations are the cornerstone for

progression.
WEB RESOURCES
1. HR and sustainable competitive advantage (on-line course) -
YouTube
2. What is Competitive Advantage? - Bing video
3. Human Resource Competitive Advantage - Bing video
4. What is Competitive Advantage? Definition & Meaning of
Competitive Advantage in Business - Animated - Bing video
1.d) 2. c) 3. c) 4. b ) 5. c)
34
BLOCK 2
HUMAN RESOURCE PLANNING,

RECRUITMENT & SELECTION
Unit 5: Human Resource Planning
Unit 6: Job Analysis, Job Specification and Job

Description
Unit 7: Absenteeism and Labor Turnover
Unit 8: Recruitment and Selection
Unit 9: Demotion and Separation
35
UNIT 5
HUMAN RESOURCE PLANNING

STRUCTURE
Overview
Learning Objectives
5.1 Human Resource Planning
5.1.1 Manpower Planning
5.2 Planning Process Steps

5.2.1 Current HR Supply
5.2.2 Future HR Demand
5.2.3 Demand Forecast
5.2.4 HR Sourcing Strategy and Implementation
5.3 Building Resilience to the Dynamic Economic Environment
5.4 Improving Operations in Human Resource Planning Process
5.5 Adapt to Technology Changes
5.6 Enable Growth Phase for Small and Mid-Size Businesses
5.7 Anticipating Changes in the Labour Market
5.8 Strategy consideration of Planning
5.9 The purpose of strategic planning
5.10 Important strategic planning issues to consider

Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
OVERVIEW
Human resources are one of the important factors of production and
performance of the organization is directly related to the quality of its
human resources. Human Resource Planning (HRP) is concerned with
the planning the future manpower requirements of an organization. It
includes replacement plans and managerial succession plans. HRP
ensures that the organization has the right number and type of people at
the right places, at the right time, doing the right job for the benefit of the
36
individual and the organization. HRP relates to manpower availability in
an organization. It is an integral part of corporate planning. Every
organization plans for other factors of production such as money,
machines and market and it should also plan for human resources. HRP
is the first step in recruitment, selection and placement of employees.
HRP is also known as Manpower Planning, Personnel Planning or
Employment Planning. In this unit, you are going to learn about HRP and
its approach.
LEARNING OBJECTIVES
After studying this unit, you will be able to.
• describe the concept of Human Resource Planning
• discuss about approach of job design
• examine the absenteeism and labor turnover
• evaluate recruitment and selection system
5.1 HUMAN RESOURCE PLANNING
Definitions of Human Resource Planning

According to Dale S. Beach, “It is a process for determining and
assuring that the organization will have an adequate number of qualified
persons, available at the proper times, performing jobs which meet the
needs of the enterprise, and which provide satisfaction for the individuals
involved”.
Coleman has defined HRP as the “process of determining manpower
requirements and the means for meeting those requirements in order to
carry the integrated plan of the organization”.
• Human Resource Planning (HRP) is the process of forecasting the
future human resource requirements of the organization and
determining as to how the existing human resource capacity of the
organization can be utilized to fulfil these requirements. It, thus,
focuses on the basic economic concept of demand and supply in
context to the human resource capacity of the organization. It is the
HRP process which helps the management of the organization in
meeting the future demand of human resource in the organization
with the supply of the appropriate people in appropriate numbers at
the appropriate time and place.
• Further, it is only after proper analysis of the HR requirements can
the process of recruitment and selection be initiated by the
management. Also, HRP is essential in successfully achieving the
strategies and objectives of organization. In fact, with the element of
37
strategies and long-term objectives of the organization being widely
associated with human resource planning these days, HR Planning
has now become Strategic HR Planning.
• Though, HR Planning may sound quite simple a process of managing
the numbers in terms of human resource requirement of the
organization, yet the actual activity may involve the HR manager to
face many roadblocks owing to the effect of the current workforce in
the organization, pressure to meet the business objectives and
prevailing workforce market condition.
• Organizations in growth phase may face the challenge of meeting the
need for critical set of skills, competencies and talent to meet their
strategic objectives so they can stand well-prepared to meet the HR
needs considering the organizational goals, HR Planning allows the
identification, selection and development of required talent or
competency within the organization.
• It is, therefore, suitable on the part of the organization to opt for HR
Planning to prevent any unnecessary hurdles in its workforce needs.
An HR Consulting Firm can provide the organization with a
comprehensive HR assessment and planning to meet its future
requirements in the most cost-effective and timely manner.
5.2 PLANNING PROCESS STEPS

5.2.1. Current HR Supply: Assessment of the current human resource
availability in the organization is the foremost step in HR Planning. It
includes a comprehensive study of the human resource strength of the
organization in terms of numbers, skills, talents, competencies,
qualifications, experience, age, tenures, performance ratings,
designations, grades, compensations, benefits, etc.
At this stage, the consultants may conduct extensive interviews with the
managers to understand the critical HR issues they face and workforce
capabilities they consider basic or crucial for various business processes.
5.2.2. Future HR Demand: Analysis of the future workforce requirements
of the business is the second step in HR Planning. All the known HR
variables like attrition, lay-offs, foreseeable vacancies, retirements,
promotions, pre-set transfers, etc. are taken into consideration while
determining future HR demand. Further, certain unknown workforce
variables like competitive factors, resignations, abrupt transfers or
dismissals are also included in the scope of analysis.
5.2.3. Demand Forecast: Next step is to match the current supply with
the future demand of HR and create a demand forecast. Here, it is also
38
essential to understand the business strategy and objectives in the long
run so that the workforce demand forecast is such that it is aligned to the
organizational goals.
5.2.4. HR Sourcing Strategy and Implementation: After reviewing the
gaps in the HR supply and demand, the HR Consulting Firm develops
plans to meet these gaps as per the demand forecast created by them.
This may include conducting communication programs with employees,
relocation, talent acquisition, recruitment and outsourcing, talent
management, training and coaching, and revision of policies. The plans
are, then, implemented taking into confidence the mangers so as to make
the process of execution smooth and efficient. Here, it is important to note
that all the regulatory and legal compliances are being followed by the
consultants to prevent any untoward situation coming from the
employees.
Human Resource Planning is a process of forecasting and strategizing to
meet the organization’s demand and supply of manpower needs in the
present and future. It is a process to ensure that you have the right people
with the right skillset in your team thereby building a strong workforce
capability in your organization.
No business strategy can succeed without an abled workforce that
innovates and competes to grow your organization. Human resource
Planning helps to take care of any critical shortages in manpower hence
mitigating business risks.
5.3 BUILDING RESILIENCE TO THE DYNAMIC ECONOMIC
ENVIRONMENT
Our world is going through metamorphic changes in technology.
Globalization and cultural shifts are a reality. Consequently, product shelf
life is shortening, and the skill gaps are rising high. Not just the physical
or financial capital, human capital needs to adapt to this new reality. The
world’s socio-economic structure has changed to a knowledge-based
economy and having talent superheroes is fundamental to survival.
An effective Human Resource Planning enables us to build resilience in
combating volatile business situations like mergers and acquisitions,
increased offshore jobs, industry competition, changes in government
legislature, etc.
39
5.4 IMPROVING OPERATIONS IN HUMAN RESOURCE PLANNING
PROCESS
Workforce analysis and human resource planning process helps to
streamline various business functions as can plan the right deployment of
the workforce according to need. Know well in advance potential
shortages in any discipline of business and are prepared to take care of
it. This avoids any potential operational danger that may result due to the
shortage or surplus of manpower. Good HR planning also supports the
distribution of talent across geographies and culture in a planned way
hence creating a positive value proposition. Introducing training and
proper succession plans reduces risks of talent void thereby increasing
productivity.
5.5 ADAPT TO TECHNOLOGY CHANGES
Millennials are a huge 50 percent of the workforce distribution, and the
future belongs to a technologically advanced human resource team that
can learn and adapt to meet the expectations of these millennials. Data-
driven analysis has become imperative for future-ready businesses. A
correct Human resource plan is instrumental in introducing and
distributing talent across diverse business functions and technology
groups thereby supporting growth.
Also, technological changes require organizations to keep evolving the
way you do business. Current skills may become obsolete in the future.
New technology requires a new skill set that is not readily available in the
labour market. A proper plan to scout and hire for the required skillset is
vital.
5.6 ENABLE GROWTH PHASE FOR SMALL AND MID-SIZE
BUSINESSES
Small businesses’ growth is often sudden and dynamic. They get
impacted by the external environment the most.HR planning for small
businesses is not just an additional adjustment but an integral part of the
overall growth strategy. Often small businesses need to plan when to
outsource, how many people to recruit, what are the compensation
benefits on offer etc.
A small business may initially start with 2-3 people, but their business
strategy needs to involve a human plan to know how they are going to
grow in team size to meet business goals.
40
5.7 ANTICIPATING CHANGES IN THE LABOUR MARKET
As per Deloitte’s 2017 report on Global Human capital trends, the digital
age is changing the skill requirements constantly. Acquiring the right talent
has become quite a challenge and poses a growth risk for many
companies. The economy has become Knowledge-based, and the
expectations of the employees have changed manifold. They have
become equal opportunity stakeholders and have their voice in defining
the growth strategy.
5.8 STRATEGY CONSIDERATION OF PLANNING
Growing a business means taking many decisions about the way you want
to expand your operations. Creating a strategic plan is a key component
of planning for growth. It will help you prepare a realistic vision for the
future of your business and in doing so can maximize your business'
potential for growth.
In the past, human resource management (HRM) was called the
personnel department. In the past, the personnel department hired people
and dealt with the hiring paperwork and processes. It is believed the first
human resource department was created in 1901 by the National Cash
Register Company (NCR). The company faced a major strike but
eventually defeated the union after a lockout. After this difficult battle, the
company president decided to improve worker relations by organizing a
personnel department to handle grievances, discharges, safety concerns,
and other employee issues. The department also kept track of new
legislation surrounding laws impacting the organization. Many other
companies came to the same realization that a department was necessary
to create employee satisfaction, which resulted in more productivity. In
1913, Henry Ford saw employee turnover at 380 percent and tried to ease
the turnover by increasing wages from $2.50 to $5.00, even though fair
during this time period. Of course, this approach didn’t work for long, and
these large companies began to understand they had to do more than hire
and fire if they were going to meet customer demand.
Most people agree that the following duties normally fall under HRM. Each
of these aspects has its own part within the overall strategic plan of the
organization
• Staffing: Staffing includes the development of a strategic plan to
determine how many people you might need to hire. Based on the
strategic plan, HRM then performs the hiring process to recruit and
select the right people for the right jobs. We discuss staffing in
greater detail in “Compensation and Benefits”.
41
• Basic workplace policies: Development of policies to help reach
the strategic plan’s goals is the job of HRM. After the policies have
been developed, communication of these policies on safety,
security, scheduling, vacation times, and flextime schedules should
be developed by the HR department. Of course, the HR managers
work closely with supervisors in organizations to develop these
policies. Workplace policies will be addressed throughout the book.
• Compensation and benefits: In addition to paychecks, 401(k)
plans, health benefits, and other perks are usually the responsibility
of an HR manager. Compensation and benefits are discussed
“Compensation and Benefits” and “Retention and Motivation”.
• Retention: Assessment of employees and strategizing on how to
retain the best employees is a task that HR managers oversee, but
other managers in the organization will also provide input.
“Successful Employee Communication”, “Managing Employee
Performance”, and “Employee Assessment” cover different types of
retention strategies, from training to assessment.
• Training and development: Helping new employees develop skills
needed for their jobs and helping current employees develop their
skills are also tasks for which the HRM department is responsible.
Determination of training needs and development and
implementation of training programs are important tasks in any
organization. Training is discussed in great detail “Successful
Employee Communication”, including succession planning.
Succession planning includes handling the departure of managers
and making current employees ready to take on managerial roles
when a manager does leave.
• Regulatory issues and worker safety: Keeping up to date on new
regulations relating to employment, health care, and other issues is
generally a responsibility that falls on the HRM department. While
various laws are discussed throughout the book, unions and safety
and health laws in the workplace are covered in “Working with Labor
Unions” and Chapter 13 “Safety and Health at Work”.
In smaller organizations: the manager or owner is likely performing the

HRM functions they hire people, train them, and determine how much they
should be paid. Larger companies ultimately perform the same tasks, but
because they have more employees, they can afford to employ
specialists, or human resource managers, to handle these areas of the
business. As a result, it is highly likely that you, as a manager or
entrepreneur, will be performing HRM tasks, hence the value in
understanding the strategic components of HRM.
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5.9 THE PURPOSE OF STRATEGIC PLANNING
• The purpose of strategic planning is to set your overall goals for
your business and to develop a plan to achieve them. It involves
stepping back from your day-to-day operations and asking where
your business is headed and what its priorities should be.
• Taking the decision actively to grow a business means embracing
the risks that come with growth. Spending time identifying exactly
where you want to take in the business - and how will get there -
should help to reduce and manage those risks.
• As business becomes larger and more complex, strategy
formulation will need to become more sophisticated, both to sustain
growth and to help muster the leadership and resources needed to
keep the business developing.
• To do this, need to start collecting and analyzing a wider range of
information about the business - both about how it operates
internally and about how conditions are developing in your current
and potential markets.
5.10 IMPORTANT STRATEGIC PLANNING ISSUES TO CONSIDER
Growing a business can pose some considerable personal challenges to

the owner or manager, whose role can change dramatically as the
business grows.
Effective strategic planning involves considering options that challenge

the way that business has been done up to this point. It may be that
decision-making in some areas will be handed to others, or that processes
which have worked well in the past will no longer fit with future plans.
It can be tempting for owners or managers to overlook alternatives that
are uncomfortable for them personally, but to disregard your options on
these grounds can seriously compromise the strategic plan and ultimately
the growth of the business.
LET US SUM UP
In this unit, you have learnt that the process of human resource planning
is vital in assessing both the current and future personnel need of an
organization in terms of quantity as well as quality. It is a fundamental
process that directly links human resource activities to organizational
plans and objectives. Furthermore, this process cushions organizations
from different challenges by preparing it for different factors, external and
internal that may affect its activities. It should be taken seriously
considering that it determines the successful implementation and
achievement of an organization's objectives and goals.
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CHECK YOUR PROGRESS
Choose the Correct Answer
1. Which of the following factors state the importance of Human
Resource Planning?
a) Creating highly talented personnel
b) International strategies
c) Resistance to change and move
d) All of the above
2. Which of the following options is not the factor that hinders the human
resource planning process?
a) Type and quality of forecasting information
b) Time horizons
c) Environmental uncertainties
d) Unite the perspectives of line and staff managers
3. What is the major issue faced while doing personal planning?
a) Type of information which should be used in making forecasts
b) Types of people to be hired
c) Multiple positions to be filled
d) All of the above
4. __________ is the process of forecasting an organisations future
demand for, and supply of, the right type of people in the right number.
a) Human Resource Planning
b) Recruitments
c) Human Resource Management
d) Human Capital Management
GLOSSARY
Retention : Retention is defined as the process by which a

company ensures that its employees don't quit
their jobs.
Strategic : Strategic planning is a process in which an

Planning organization's leaders define their vision for the
future and identify their organization's goals and
objectives.
Compensation : Compensation refers to monetary payment

given to an individual in exchange for their
44
services. In the workplace, compensation is
what is earned by employees.
Demand : Demand forecasting is a technique that is used

Forecast for the estimation of what can be the demand
for the upcoming product or services in the
future.
SUGGESTED READINGS
1. David M. Schweiger · 2013, “ Human Resources Planning : Solutions to
key Business Issues”
2. William J. Rothwell, H. C. Kazanas · 2003 , “ Planning and Managing
Human Resources “- Strategic Planning.
WEB RESOURCES
1. HR Basics: Human Resource Planning - Bing video
2. Human Resource Planning - Bing video
3. Human Resource Management: Chapter 5 - Human Resource
Planning - Bing video
4. Human Resource Planning Process - Bing video
1. d) 2. d) 3. a) 4. a)
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UNIT 6
JOB ANALYSIS, JOB SPECIFICATION

AND JOB DESCRIPTION
STRUCTURE
Overview
Learning Objectives
6.1 Job Analysis
6.1.1. Organizational Job Analysis
6.2 Job Specification

6.2.1. Elements of a job specification
6.3 Job Description
6.3.1. Importance of Job Description
6.4 Approaches to job design
6.5 Job simplification
6.6 Job Enlargement
6.7 Job Rotation
6.7.1. Advantage of Job Rotation Technique
6.7.2. Disadvantage of Job Rotation Technique

6.8 Job Enrichment
6,9 Difference between Job Enlargement and Job Enrichment
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Job analysis is a systematic and detailed examination of jobs. It is the

process of collecting information about a job — that is, the knowledge,
skills, and the experience needed to carry out a job effectively. The
jobholder is supposed to possess job-related knowledge useful to carry
46
out the job easily. In this unit, you will learn job analysis which is vital
concept of HRM.
Job analysis is a term used to describe the process of defining jobs. It is
required to ascertain the fundamental needs of the job performed in an
organization. The results of the job Analysis assist in hiring the appropriate
talent for the right job.
A job analysis is a detailed investigation, study, and documenting of a
specific job's responsibilities, duties, skills, accountabilities, work
environment, and ability requirements. It also requires determining the
proportional importance of a job's tasks, commitments, and physical and
emotional abilities. All of these factors determine what a job entails and
what qualities an individual must possess in order to accomplish a good
job.
The Job Analysis process is to conduct a study on the data collected on
the job to find out the real human requirement of the Job such as Job
activities its attributes and other important tasks required for performing a
specific job.
LEARNING OBJECTIVES

• get insight knowledge on the meaning Job Specification
• explain the process of Job enrichment and job rotation
• examine the knowledge level of employees
• explore the types of varied skills of workers.
6.1 JOB ANALYSIS
The job Analysis process in HRM helps to identify the requirements of a
job and describe the suitability of a person who is supposed to perform
the job. Information on job analysis is used in order to prepare job
descriptions and specifications. It is also utilized to design organizational
structure, proper recruitment devices, and selection methods along with
compensation offered for the job. Further, the performance appraisal,
training and development facilities, career path counseling, and health-
related conditions are also determined based on the job analysis.
The Job Analysis Process also helps HRM and allows an organization to
identify the roadmap of Job progression for an employee and their interest
in the opportunities available in the job for career advancement and
increased pay and benefits.
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According to Michael L. Jucius, “Job analysis refers to the process of
studying the operations, duties and organizational aspects of jobs in order
to derive specifications or as they called by some, job descriptions.”
job analysis is used as a basis of several interrelated personnel
management activities
1) Achievement of Goals: Weather and Davis have stated, “Jobs are
at the core of every organization’s productivity, if they are designed
well and done right, the organization makes progress towards its
objectives. Otherwise, productivity suffers, profits fall, and the
organization is less able to meet the demands of society, customer,
employees, and other with a stake in its success.”
2) Organizational Design: Job analysis will be useful in classifying the
jobs and the interrelationships among the jobs. On the basis of
information obtained through job analysis, sound decisions
regarding hierarchical positions and functional differentiation can be
taken and this will improve operational efficiency.
3) Organization and Manpower Planning: It is helpful in organization
planning, for it defines labour in concrete terms and co-ordinates the
activities of the work force, and clearly divides duties and
responsibilities.
4) Recruitment and Selection: Job analysis provides you with
information on what the job entails and what human requirements
are required to carry out these activities. This information is the basis
on which you decide what sort of people to recruit and hire.
5) Placement and Orientation: Job analysis helps in matching the
job requirements with the abilities, interests and aptitudes of people.
Jobs will be assigned to persons on the basis of suitability for the
job. The orientation programme will help the employee in learning
the activities and understanding duties that are required to perform
a given job more effectively.
6) Employee Training and Management Development: Job analysis
provides the necessary information to the management of training
and development programmes. It helps in to determine the content
and subject matter of in training courses. It also helps in checking
application information, interviewing test results and in checking
references.
7) Job Evaluation and Compensation: Job evaluation is the process
of determining the relative worth of different jobs in an organization
with a view to link compensation, both basic and supplementary,
with the worth of the jobs. The worth of a job is determined on the
basis of job characteristics and job holder characteristics. Job
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analysis provides both in the forms of job description and job
specification.
8) Performance Appraisal: Performance appraisal involves
comparing each employee’s actual performance with his or her
desired performance. Through job analysis industrial engineers and
other experts determine standards to be achieved and specific
activities to be performed.
9) Health and Safety: It provides an opportunity for identifying
hazardous conditions and unhealthy environmental factors so that
corrective measures may be taken to minimize and avoid the
possibility of accidents.
10) Employee Counselling: Job analysis provides information about
career choices and personal limitation. Such information is helpful in
vocational guidance and rehabilitation counselling. Employees who
are unable to cope with the hazards and demands of given jobs may
be advised to opt for subsidiary jobs or to seek premature retirement.
Job analysis is a very useful tool from the HR point of view, but it is difficult
to execute. The job Analysis process involves five steps that have to be
followed for a favorable end result. The steps are described below:
6.1.1. Organizational Job Analysis
The pertinent information regarding the job is obtained at the
organizational level. It is critical to know what the performance level
organization is is looking forward from the job holder and the contribution
of the job to the goal attainment of the organization. The job-related
information is then used to create an organizational chart. It consists of
different job classes, flow charts, the flow of job activities, and sharing
points of different job profiles.
• Selecting Representative Jobs for Analysis
It is important to understand that the analysis of jobs of the
organization is a bit time-consuming and costly affair. Thus, only
some sample jobs are selected in order to carry out a detailed job
analysis.
• Collection of Data for Job Analysis
The information related to different features of the job and the abilities
required to execute the job is collected from the organization. The job
analysis tools such as observation, interviews, and questionnaires
are used for the collection of data.
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• Preparing Job Description
Based on the collected data the HR team prepares a job description
by defining the tasks, duties, and responsibilities which are
discharged for effective performance.
• Preparing Job Specification
The job specification is prepared which consist of the personal traits,
skills, qualities, and qualification which are required to perform the
job properly.
6.2. JOB SPECIFICATION
The job specification states the minimum acceptable qualifications that
the incumbent must possess to perform the job successfully. Based on
the information acquired through job analysis, the job specification
identifies the knowledge, skills, and abilities needed to do the job
effectively. Individuals possessing the personal characteristics identified
in the job specification should perform the job more effectively than
individuals lacking these personal characteristics. The job specification,
therefore, is a important tool in the selection process, for it keeps the
selector’s attention on the list of qualifications necessary for an incumbent
to perform the job and assists in determining whether candidates are
qualified.
Job specification can help hiring managers decide which qualities and
requirements are most important in a candidate. When reading these job
specifications, a candidate can decide whether they have the right
experience, education and characteristics to apply for a specific job.
Learning the details and components of job specifications can help you
create effective ones to hire the best talent for your company. we discuss
what a job specification is, why it is important, what elements are in a job
specification and give examples of each.
A job specification is the list of recommended qualities for a person to
qualify for and succeed in a position. While the job description includes
the title position, responsibilities and summary, the specification identifies
the skills, traits, education and experience a candidate might need to
qualify for that job. This helps outline a candidate's capabilities to perform
what's listed in the job description.
A job specification is important because it can help provide more insight
into what skills a candidate will use in a role rather than what tasks they
will do. Hiring managers write these to help encourage the most qualified
candidates to apply for a job. Often, recruiters or other human resources
employees use the job specification to understand what qualifications,
50
education and skills the hiring manager seeks as they help to fill the
position. An effective job specification can help a company find and hire
the most qualified person.
6.2.1. Elements of a job specification
Although the job specification might vary from position to position, there
are a few common elements you can expect to see in many of them,
including:
• Required experience
This job specification is where an employer might include the
required experience in an exact role or relevant experience in similar
roles. Entry-level positions, for example, might specify they don't
require any experience, but a director job might want seven years of
experience in managerial roles.
• Required education
A job specification can indicate the level of education required to
qualify. Education requirements may include general
accomplishments like a high school diploma, associate or bachelor's
degree, several years completed towards a degree or one in a
specific area of study. You might include this to ensure the employee
has the proper context and knowledge to perform their job duties
successfully.
• Required certification or credentials
In addition to education, some positions require certification or
licensure. This might align with responsibilities in the job description
because a company might have you get certain credentials before
you perform some tasks. For example, a mechanic job description
might list working on heavy machinery or trucks as a responsibility,
or it could require a candidate to have a certification to provide the
services in the job specification. Credential requirements also could
vary based on location to account for local laws. For example,
substitute teachers could require state-level certification to qualify for
a job even if they earned a bachelor's degree and a state certification
elsewhere.
• Required skills
Hiring managers, employees and human resources professionals
may work together to establish the skills they want candidates to
have. Skills can be what people might need to complete their job
tasks, and they can centre on how the candidate may fit on a team
or reflect a company's culture. Skills included in a job specification
can also vary based on job level. For example, entry-level jobs might
51
have fewer required skills because hiring managers may expect new
employees can develop them while working.
• Personality traits
While skills can be technical or job-specific relating to how a
person does their job, personality traits are qualities that reflect a
candidate's character. For example, professionalism is a trait that
describes a person who understands workplace etiquette and is
helpful and respectful to their co-workers. You might need this trait
for a job in a formal office setting. Matching every trait might not
be a requirement, but they can explain what characteristics may
make it easier to perform well.
• Demands
Jobs might specify if there are physical demands. For example, if
a warehouse job description says you will carry packages from one
location to another, the job specification might want you to be able
to lift boxes up to 50 pounds. In this case, the specification
identifies how much weight the candidate might need to carry to
ensure they can fulfill the requirement. Similarly, an office job
might require long hours at a computer, and the specification can
identify this to ensure the candidate's vision allows them to
perform their duties.
According to Dale Yoder, “The job specification, as such a summary

properly described is thus a specialized job description, emphasizing
personnel requirement and designed specially to facilitate selection and
placement.”
Flippohas defined job specification as, “Job specification is a statement
of the minimum acceptable human qualities necessary to perform a job
properly. It is a standard of personnel and designates the qualities
required for acceptable performance”.
In is clear from the above definitions that job specification is a statement
of summary of personnel requirements for a job. It may also be called
“standard of personal for the selection” A Job Specification should include:
i. Physical characteristics, which include health, strength, endurance,
age, height, weight, vision, voice, eye, hand and foot co-ordination,
motor co-ordination, and colour discrimination.
ii. Psychological and social characteristics such as emotional stability,
flexibility, decision making ability, analytical view, mental ability,
pleasing manners, initiative, conversational ability etc.
iii. Mental Characteristics such as general intelligence, memory,
judgement, ability to concentrate, foresight etc.
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iv. Personal Characteristics such as sex, education, family background,
job experience, hobbies, extracurricular activities etc.
All these characteristics must be classified into three categories:
• Essential attributes which a person must possess.
• Desirable attributes which a person ought to possess.
• Contra indicators which will become a handicap to successful job
performance.
6.3. JOB DESCRIPTION
Job description is the immediate product of job analysis process; the data
collected through job analysis provides a basis for job description and job
specification. Job Description is a written record of the duties,
responsibilities and requirements of a particular job.
Job description is an informative documentation of the scope, duties,
tasks, responsibilities and working conditions related to the job listing in
the organization through the process of job analysis. Job description also
details the skills and qualifications that an individual applying for the job
needs to possess. It basically gives all the details which might be good for
both the company and the applicant so that both parties are on the same
page regarding the job posting. Basically, job analysis is bifurcated into
two components namely job description and job specification.
6.3.1. Importance of Job Description
Job description is the most important thing which a candidate gets about
a job listing. It gives all the relevant and necessary details about a job.
The details which can help one decide whether the job is relevant or not.
Qualifications, roles, responsibilities etc are included in the job description
document which paints a clear picture of what is expected from the
particular role. It gives an opportunity for a candidate to prepare well for a
job interview. It also helps companies identify all skills required by a right
candidate.
It is concerned with the job itself and not with the job holders. It is a
statement describing the job in such terms as its title, location, duties,
working conditions and hazards.
Job description refers to a written informative documentation that states
the duties, tasks, responsibilities and qualifications of a job, based on the
findings of a job analysis. Job description is used either in the recruitment
process to inform the applicants of the job profile and requirements or in
the performance management process to evaluate the employee’s
performance.
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Flippo has Defined Job Description as, “A job description is an
organized, factual statement of duties and responsibilities of a specific job.
In brief, it should tell what is to be done. How it is done why. It is a standard
of function, in that defines the appropriate and authorized content of a
job”.
According to Pigors and Myres, “Job description is a pertinent picture
(in writing) of the organizational relationships, responsibilities and specific
duties that constitutes a given job or position. It defines a scope of
responsibility and continuing work assignments that are sufficiently
different form that of other jobs to warrant a specific title.”
According to Zerga, who analyzed on job description about 30 years
ago. A job description helps us in:
i. Job grading and classification
ii. Transfers and promotions.
iii. Adjustments of grievances.
iv. Defining and outlining promotional steps
v. Establishing a common understanding of a job between employers
and employees.
vi. Investigation accident.
vii. Indicating faulty work procedures or duplication of papers.
viii. Maintaining, operating and adjusting machinery.
ix. Time and motion studies.
x. Defining the limits of authority.
xi. Indicating case of personal merit.
xii. Studies of health and fatigue.
xiii. Scientific guidance.
xiv. Determining jobs suitable for occupational therapy.
xv. Providing hiring specifications; and
xvi. Providing performance indicators.
“Job description” is different from “performance assessment.” The former
concerns such functions as planning, co-ordination, and assigning
responsibility, while the latter concerns the quality of performance itself.
Though job description is not assessment, it provides an important basis
establishing assessment standards and objectives.
6.4 APPROACHES TO JOB DESIGN
• Job design is of comparatively recent origin. The human resource
managers have realized that the design of a job has considerable
influence on the productivity and job satisfaction; poorly designed
jobs often result in boredom to the employees, increased turnover,
54
job dissatisfaction, low productivity and an increase in overall costs
of the organization. All these negative consequences can be
avoided with the help of proper job design.
• Job design means deciding the contents of a job. It fixes the duties
and responsibilities of the job, the methods of doing the job, and the
relationships between the job holder (manager) and his superiors,
subordinates, and colleagues.
• Through job design, organizations try to raise productivity levels by
offering non-monetary rewards such as greater satisfaction from a
sense of personal achievement in meeting the increased challenge
and responsibility of one’s work.
• The process of putting together various elements to form a job,
bearing in mind organizational and individual worker requirements
and considerations of health, safety, and ergonomics.
• The scientific management approach of F. W. Taylor viewed job
design as purely mechanical. Still, the later human relations
movement rediscovered the importance of workers’ relationship to
their work and stressed job satisfaction.
• Good job design accommodates employees’ mental and physical
characteristics by paying attention to muscular energy such as
work/rest schedules or pace of work, and mental energy such as
boring versus complicated tasks.
• Allows for employee input, this means employees should have the
option to vary activities according to personal needs, work habits,
and the circumstances in the workplace, gives an employee a sense
of accomplishment, Includes training, so the employee knows what
tasks to do and how to do them properly, Provides good work/rest
schedules, allows for an adjustment period for physically demanding
jobs, Provides feedback to the employees about their performance,
minimizes energy expenditure and force requirements, balances
static and dynamic work.
• Job design is an ongoing process. The goal is to make adjustments
as conditions or tasks change within the workplace.
According to Jon Werner and DeSimone, “Job design is the

development and alteration of the components of a job (such as the tasks
one performs, and the scope of one’s responsibilities) to improve
productivity and the quality of the employees’ work life.”
Job design has been defined by Davis (1966) as: “The specification of the
contents, methods, and relationships of jobs in order to satisfy
technological and organizational requirements as well as the social and
personal requirements of the job-holder.”
55
Milkovich and Boudreau defined job design as, “Job design integrates
work content (tasks, functions, and relationships), the rewards (extrinsic
and intrinsic) and the qualifications required (skills, knowledge, abilities)
for each job in a way that meets the needs of employees and the
organization.”
Approaches of Job Design
Approaches are the bases of the approach used in job design. Robertson
and Smith (1985) have suggested the following five principles of job
design:
i. To influence skill variety, provide opportunities for people to do
several tasks and combine tasks.
ii. To influence task identity, combine tasks and from natural work
units.
iii. To influence task significance, form natural work units and inform
people of the importance of their work.
iv. To influence autonomy, give people responsibility for determining
their own working systems.
v. To influence feedback; establish good relationship and open
feedback channels.
6.5 JOB SIMPLIFICATIONS
Job Simplification: In job simplification, the complete job is broken down
into small subparts; this is done so that employee can do these jobs
without much specialized training. Moreover, small operations of the job
can also be performed simultaneously so that the complete operation can
be done more quickly. For job simplification, generally time and motion
studies are used.
The Job Simplification means breaking the job into relatively easier sub-
parts with the intention to enhance the individual’s productivity by
minimizing the physical and mental efforts required to perform a complex
job.
Once the complex task is divided into the relatively easier tasks, each task
is assigned to the individuals who perform these over and over again. By
doing the same thing again and again, the employees gain proficiencies
in the jobs assigned to them and as a result, the profitability of the
organization increases.
Under the job simplification method, the organization saves its training
cost, as a very low level of skills is required to perform the simplified jobs.
56
Also, the job speed increases, as the individual is required to perform a
small portion of the previously larger and complex job.
But however, by performing the same task again and again, the
employees may feel boredom and may resist the monotony. This may
lead to an increase in the employee absenteeism, mistakes and
accidents, etc. Due to these negative consequences, the overall
productivity may get adversely affected, and the organization may suffer
losses as a whole.
Thus, an organization cannot resort to the job simplification every time to
reap the economic benefits. It must look at the organizational conditions
prevailing at the time of designing the job.
Job simplification is a widely used process in many organizations. In
simple terms, job simplification means simplifying a complex job into
several simpler parts. It is intended to improve the productivity of the
individual by lessening the work-pressure on him. The work-pressure
includes strenuous physical activity, mental pressure, and psychological
stress caused due to complex jobs.
A complex job is considered, and then it is broken down into smaller and
simpler parts. These simpler parts are reach assigned to employees, and
they are employed to work on that part of the job only. The employees’
work is repetitive, and that increases the expertise of the employee on
that particular job. Therefore, it leads to individual skill formation of the
employee as well as increases the productivity of the company. It is a
component of job design where job rotation and job enlargement is also a
part.
6.6 JOB ENLARGEMENT
Another means of increasing employee’s satisfaction with routine jobs is
job enlargement, or increasing the number of tasks performed (i.e.
increasing the scope of the job). Job enlargement, like job rotation, tries
to eliminate short job cycles that create boredom. Unlike job rotation, job
enlargement actually increases the job cycle. When a job is enlarged,
either the tasks being performed are enlarged or several short tasks are
given to one worker. Thus, the scope of the job is increased because there
are many tasks to be performed by the same worker. Job enlargement
programs change many methods of operation- in contrast to job rotation,
in which the same work procedures are used by workers who rotate
through workstations.
Although job enlargement actually changes the pace of the work and the
operation by reallocating tasks and responsibilities, it does not increase
57
the depth of a job. The focus of designing work for job enlargement is the
exact opposite of that for job specialization. Instead of designing jobs to
be divided up into the fewest of tasks per employee, a job is designed to
have many tasks for the employee to perform. An enlarged job requires a
longer training period because there are more tasks to be learned. Worker
satisfaction should increase because is reduced as the job scope is
expanded.
However, job enlargement programs are successful with jobs what have
increased scope; such workers are less prone to resort to absenteeism,
grievances, slowdowns and other means of displaying job dissatisfaction.
Enlargement is done only on the horizontal level. Thus, the job remains
the same, but becomes of a larger scale than before.
Job enlargement is a job design technique wherein there is an increase in
the number of tasks associated with a certain job. In other words, it means
increasing the scope of one’s duties and responsibilities. The increase in
scope is quantitative in nature and not qualitative and at the same level.
Job enlargement is a horizontal restructuring method that aims at increase
in the workforce flexibility and at the same time reducing monotony that
may creep up over a period of time. It is also known as horizontal loading
in that the responsibilities increase at the same level and not vertically.
Many believe that since the enlargement is horizontal in nature there is
not a great need for training! Contrary to this, job enlargement requires
appropriate training especially on time and people management. Task
related training is not required much since the person is already aware of
the same or doing it for some time.
6.7 JOB ROTATION
Job Rotation: Another technique designed to enhance employee
motivation is job rotation, or periodically assigning employees to
alternating jobs or tasks. For example, an employee may spend two
weeks attaching. Bumpers to vehicles and the following two weeks
making final checks of the chassis. During the next month, the same
employee may be assigned to two different jobs. Therefore, the employee
would be rotated among four jobs. is movement of employees on different
job role which enriches their skills, ability to work on different roles and
experience. It is a useful HR strategy to create awareness among
employees about all types of job performed in their vertical.
Job Rotation is defined as a management technique which is used to shift

employee from one job to another in order to make them familiar with all
the verticals of an organization. The objective of job rotation is to enhance
58
the work experience of the employees, to cross-train them and improve
their job satisfaction.
The advantage of job rotation is that employees do not have the same
routine job day after day. Job rotation only addresses the problem of
assigning employees to jobs of limited scope; the depth of the job does
not change.
The purpose of job rotation policy is to create a talent pool for organization
by cross training the employees. The job rotation policy also serves
different purposes as listed below-
• To create a career path for employees in the organization by
rotating their work profile from dead end job
• To provide the employee opportunity to gain new knowledge and
job processes.
• To enhance the understanding of the employees about working of
the company
• To keep employee motivated and productive, throughout their
journey in the organization
• To create unity among employees by providing them a chance to
work with each other on different projects
The job cycle of the actual daily work performed has not been lengthened
or changed. Instead, employees are simply assigned to different jobs with
different cycles. Because job rotation does not change the basic nature of
jobs, it is criticized as nothing more than having an employee perform
several boring and monotonous jobs rather than one. Some employees
dislike job rotation more than being assigned to one boring job because
when they are assigned to one job they know exactly where to report and
what work to expect each day. Workers quickly realize that job rotation
does not increase their interest in their work. Although it seldom
addresses the lack of employee motivation, it gives manages a means of
coping with frequent absenteeism and high turnover.
Thus, when absenteeism or turnover occurs in the work force, managers
can quickly fill the vacated position because each employee can perform
several jobs. Job rotation is often effectively used as a training technique
for new, inexperienced employees. At higher organizational levels,
rotation also helps to develop managerial generalists because it exposes
them to several different operations.
The objective of job rotation is to ensure a well-planned job shuffling is
carried out which is beneficial for both employee and organization. The
main objectives of the job rotation are listed below-
59
• Reduction in monotony: Key objective of job rotation is to reduce
the repetitiveness in the job profile of the employee. It provides
opportunity to the employee to work on different position. It is a
motivational tool to enhance job satisfaction.
• Succession Planning: Job rotation develops a pool of employees
who can replace the existing working employees of the organization.
It provides an immediate replacement for the high-profile employees
working the organization through internal promotion.
• Right Job fit: The objective of the job rotation is to place a right
employee at right job in the organization. Fitting right employee in
right vacancy is the aim of the job rotation program.
• Exposure to all the verticals: Due to job rotation the employee gets
brief idea about how things work in the organization. It provides
basic knowledge about the operations of the organization and
makes the employee aware about their contribution in the outcome
of the organization.
• Improve the employee skills and competencies: Job rotation
actually tests the different skills and competencies of the employees.
Due to exposure to diverse work profiles the skills of the employees
get sharpened, and it increases their productivity.
• Develop a Wider Range of Work Experience: Job rotation enrich
the work experience of the employees. It prepares them for the
future challenges and helps them to adapt as per the changes in the
market.
6.7.1. Advantage of Job Rotation Technique
• The employee experiences variety of work, workplace and peer
group.
• Job rotation helps to broaden the knowledge and skills of an
employee.
• The main advantage of job rotation is that it relieves the employee
from the boredom and monotony of doing the same job.
6.7.2. Disadvantage of Job Rotation Technique
• Job rotation also creates disruptions. Members of the work group
have to adjust to the new employee.
• Productivity is reduced by moving a worker into new position just
when his efficiency at the prior job was creating organizational
economies.
• Training costs are increased.
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6.8. JOB ENRICHMENT
The concept of job enrichment has been derived from Herzberg’s two-
factor theory of motivation in which he has suggested that job content is
one of the basic factors of motivation. If the job is designed in such a
manner that it becomes more interesting and challenging to the job
performer and provides him opportunities for achievement, recognition,
responsibility, advancement and growth, the job itself becomes a source
of motivation to the individual.
Job Enrichment is a job design technique that varies the concept of job
enlargement. Job enrichment adds new sources of job satisfaction by
increasing the level of responsibility of the employee in organization.
job enlargement is considered as horizontal restructuring method, job
enrichment is considered as vertical restructuring method of moral
excellence of giving the employee additional authority, autonomy, and
control over the way the job is accomplished. Also called job enhancement
or vertical job expansion. is an attempt to motivate employees by giving
them the opportunity to use the range of their abilities. It is an idea that
was developed by the American psychologist Frederick Hertzberg in the
1950s. It can be contrasted to job enlargement which simply increases the
number of tasks without changing the challenge. As such job enrichment
has been described as 'vertical loading' of a job, while job enlargement is
'horizontal loading'. An enriched job should ideally contain. A range of
tasks and challenges of varying difficulties (Physical or Mental)
Job enrichment is a type of job redesign intended to reverse the effects of
tasks that are repetitive requiring little autonomy. Some of these effects
are boredom, lack of flexibility, and employee dissatisfaction. The
underlying principle is to expand the scope of the job with a greater variety
of tasks, vertical in nature, that require self-sufficiency. Since the goal is
to give the individual exposure to tasks normally reserved for differently
focused or higher positions, merely adding more of the same
responsibilities related to an employee's current position is not considered
job enrichment.
Job enrichment is a way to motivate employees by giving them increased
responsibility and variety in their jobs. Many employers traditionally
believed that money was the only true motivating factor for employees
and that if you wanted to get more work out of employees, offering them
more money was the only way to do it. While that may be true for a small
group of people, the majority of workers today like to work and to be
appreciated for the work they do. Job enrichment— allowing the
employees to have more control in planning their work and deciding how
61
the work should be accomplished—is one way to tap into the natural
desire most employees have to do a good job, to be appreciated for their
contributions to the company, and to feel more a part of the company
team.
According to Richard W. Beatty and Graig Eric. Schneider, “Job
enrichment is a motivational technique which emphasizes the need for
challenging and interesting work. It suggests that jobs be redesigned so
that intrinsic satisfaction is derived from doing the job. In its best
applications it leads to a vertically enhanced job by adding function from
other organizational levels, making it contain more variety and challenge
and offer autonomy and pride to the employee.”
According to P. Robbins, “Job enrichment refers to the vertical
expansion of the jobs. It increases the degree to which the worker controls
the planning, execution and evaluation of his work.”
Techniques of Job Enrichment: In order to enrich the jobs. The
management should adopt the following measures:
1) Freedom in decisions
2) Assign a natural work unit to an employee.
3) Encouraging participation
4) Allow the employee to set his own standards of performance.
5) Minimize the controls to provide freedom to the employees
6) Make an employee directly responsible for his performance.
7) Encourage participation of employees in deciding
organizational goals
8) and policies.
9) Expand job vertically
10) Introducing new, difficult and creative tasks to the employees.
11) Sense of achievement.
Advantages of Job Enrichment: The advantages of job enrichment are
as follows:
1) It enriches the role.
2) Job enrichment is the most widely used of job design as it provides
a meaningful learning to employees.
3) It makes the work interesting, and employee get motivated.
4) It helps in reducing the rate of labour turnover and absenteeism.
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6.9. DIFFERENCE BETWEEN JOB ENLARGEMENT AND JOB
ENRICHMENT
The difference between job enrichment and job enlargement is essentially
of quantity and quality. Whereas job enlargement means increasing the
scope of job quantitatively by adding up more tasks, job enrichment
means improvement in the quality of job such that employees are more
satisfied and fulfilled.
Through job enrichment an employee finds satisfaction and contentment
in his job and through job enlargement employee feels more responsible
and worthwhile in the organization.
Job enrichment entails the functions of planning and organizing, and
enlargement involves execution of the same. Both complement each
other, in that job enrichment empowers and enlargement executes.
Job enrichment depends upon job enlargement for success and the
reverse in not true.
Job enrichment means a vertical expansion in duties and responsibilities

and span of control whereas in job enlargement the expansion is
horizontal in nature.
Job enrichment has been found to have greater impact in terms of

motivation when compared to job enlargement. Since enrichment gives
employee greater insights in managerial functioning and a better work
profile, it is looked upon as an indicator of growth and development. The
same is not true in case of job enlargement which is seen as an employer
tactic to increase the workload.
Jobs or tough situations where you are expected to not only meet but also
exceed your targets in a very short period of time. What is the difference
between a junior executive and top-level manager? A junior executive is
only expected to follow his superior’s instructions whereas a top-level
manager is expected not only to make his teamwork but also handle
pressure. Remember, you are not a good boss if you are unable to handle
pressure and further pass it on to your team members. An organization
will only give you promotion if it feels you will be able to deliver without
putting unnecessary pressure on your team members.
In the words of Geroge Strauss and L.R. Sayles “Job enlargement
implies that instead of assigning one man to each job, a group of men can
be assigned to a group of jobs and then allowed to decide for themselves
how to organize the work. Such changes permit more social contacts and
control over the work process.”
63
Job enlargement has the following advantages:
• Increase in diversity of jobs
• Job satisfaction
• Provides wholeness and identity with the task and increases the
knowledge necessary to perform it.
• Provides variety of skills.
• Reduces tension and boredom.
• Trains and develops more versatile employees. Despite these
advantages this is not a completely satisfactory method of job
design as it does not increase the depth of a job. Enlarged jobs
require longer training period as there are more tasks to be
learned.
LET US SUM UP
In this unit, you have learnt about Job analysis, description and
specifications. Job analysis refers to the process used to determine the
duties and qualification of a job position. It is an important function of
human resources as job analysis is used in recruitment and hiring
strategies. The purpose of job analysis is to gather information about the
job to create job descriptions and job specifications,
The job description definition refers to a statement that includes the role
and duties of a job position. It essentially provides a scope of the job by
outlining the role and responsibilities which relate to the organization's
goals. A job description is typically used to create job postings which are
used to recruit candidates. They are meant to inform candidates about the
job and provide information about the qualifications that are required. A
job description may also be referred to as a position description, however
a position description is focused on the tasks of one person working in
one specific position. The main difference between these two is that a job
description includes the tasks of a job, but a position description
summarizes the duties of one specific employee.
A job specification is a statement that lists the qualifications and traits that
are required of a position. It is used to define the minimum qualifications
of a position and lays out the basics that are required to perform the job.
A job specification includes several components, such as the job title, job
summary, and minimum qualifications for the position. It also includes
details about education requirements and may include a section for
preferred qualifications or special abilities, depending on the position. Job
specifications are typically used by hiring managers and recruiters to
determine if the skills of prospective job candidates are a fit for the job.
64
CHECK YOUR PROGRESS
1. Job Analysis is a process where ___ are made about data collected on
a job.
a) payments
b) judgements
c) decisions
d) all of the above
2. Job Analysis is the process of studying and collecting information
relating to the ___ of a specific job.
a) operations
b) responsibility
c) both (A) and (B)
d) none of the above
3. The immediate products of job analysis are.
a) job description
b) job specifications
c) both (A) and (B)
4. Job Description provides
a) organizational information
b) functional information
c) both (A) and (B)
5.Which of the following details are mentioned in job specification?
a). Materials and forms used
b) Location
c) Hazards
d) Physical skills
65
GLOSSARY
Job : A job specification is an official document which

Specification describes the duties, required knowledge, skills
and abilities, and minimum qualifications of
State jobs.
Job Description : A job description is a useful, plain-language tool

that explains the tasks, duties, function and
responsibilities of a position.
Job Analysis : Job analysis is the process of gathering and

analyzing information about the content and the
human requirements of jobs, as well as, the
context in which jobs are performed.
SUGGESTED READINGS
1. Steven F. Cronshaw (1999), “ Functional Job Analysis: A Foundation
for Human Resources”. Publisher – Taylor and Francis.
2. Taylor & Francis (2013) “The Job Description Handbook” Amazon
Publication.
WEB RESOURCES
1. What is Job Analysis / Job Analysis = Job Description + Job

Specification - YouTube
2. HR Basics: Job Analysis - Bing video
3. HUMAN RESOURCE MANAGEMENT - 6. Job Description and Job
Specification (English) - Bing video
4. HR Basics: Job Descriptions - Bing video
5. Job Descriptions and Specifications - Bing video
1.b) 2. c) 3. c) 4. c ) 5. d)
66
UNIT 7
ABSENTEEISM AND LABOUR
TURNOVER
STRUCTURE
Overview
Learning Objectives
7.1 Absenteeism and Labour Turnover
7.2 Turnover
7.3 Features of Employee Absenteeism
7.4 Labour turnover
7.5 Causes of labour Turnover
7.6 Measures to Control Employee Absenteeism

7.6.1. Proper Working Conditions
7.6.2. Proper Selection Procedure
7.6.3. Reasonable Wage Rates

7.6.4. Proper Grievance Settlement
7.6.5. Maintaining Discipline
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
OVERVIEW
Absenteeism is a pattern or habit of an employee missing work, often for

no good reason, while turnover is the number or percentage of an
employer's workforce that must be replaced due to the voluntary and
involuntary separation of employees from employment. Absenteeism is
broadly defined as employee absence from work for lengths beyond what
is considered an acceptable time span. Frequent causes of absenteeism
include burnout, harassment, mental illness, and the need to care for sick
parents and children.in this unit, you will learn about the absenteeism and
labour turnover and its impacts
67
LEARNING OBJECTIVES
• gain knowledge on the meaning and features of absenteeism
• discuss the causes effect and control of absenteeism
• study the overall problems involved in absenteeism
• learn the methods of overcoming the absenteeism problem.
7.1. ABSENTEEISM AND LABOUR TURNOVER

According to the Indian Factories Act, 1948, “Absence is the failure of an
employee to report for work on duty when he is scheduled to work on his
duty. An employee is to be considered as scheduled to work when the
employer has work available” for him and the employee is aware of it.
According to the Indian Factories Act, 1948, “Absence is the failure of an
employee to report for work on duty when he is scheduled to work on his
duty. An employee is to be considered as scheduled to work when the
employer has work available” for him and the employee is aware of it.
According to Websters’ Dictionary, “absenteeism is the practice or habit
of being in ‘absence’, and an ‘absenter’ is one who habitually stays away”.
As per Labour Bureau, Simla, “absenteeism is the total man-shifts lost
because of absence as a percentage of the total number of man-shifts
scheduled to work”.
It denotes the absence of an employee when he is scheduled to work. An
employee is considered ‘scheduled to work’ when the employer has kept
the work ready for him and the worker is aware of it but still does not report
for duty. A leave taken by an employee is ot absenteeism.
Absenteeism is not the problem of underdeveloped countries only, but it
is a universal phenomenon. It varies from 7 percent to 30 percent, but in
extreme cases it goes upto even 40 percent.
According to Webster’s’ Dictionary, “absenteeism is the practice or habit
for duty. A leave taken by an employee is not absenteeism.
68
5.2 TURNOVER
Turnover is the number or percentage of an employer's workforce that
must be replaced due to the voluntary and involuntary separation of
employees from employment. Voluntary turnover includes leaving
employment to retire, illness, returning to school and better career
opportunities, while involuntary turnover includes layoffs and terminations
for poor performance or disciplinary problems.
According to Websters’ Dictionary, “absenteeism is the practice or habit
for duty. A leave taken by an employee is not absenteeism.
Absenteeism is not the problem of underdeveloped countries only, but it
is a universal phenomenon. It varies from 7 percent to 30 percent, but in
extreme cases it goes up to even 40 percent.
7.3 FEATURES OF EMPLOYEE ABSENTEEISM
• The rate of absenteeism is the lowest on pay day; it increases
considerably on the days following the payment of wages to
bonus.
• The level of absenteeism is comparatively high immediately after
pay day; when workers either feels like having a good time or in
some other cases return home to their village to make purchases
for the family or to meet them.
• The incidence of absenteeism, both before and after a Holiday,
has also been found to be higher than that on normal days.
• The per cent of absenteeism is generally higher in the night shifts
than in the day shifts. This is so because workers in the night shift
experience greater discomfort to uneasiness in the course of their
work then they do during daytime.
• The percentage of absenteeism is much higher in coal and mining
industries than in organized industries. This high per-centage of
absenteeism is due to the engagement of labourers in the fields,
marriages or festivals, which together are estimated to account for
about 75 per cent of the cases of with-drawals, drunkenness,
relaxation or sickness.
69
• Absenteeism in India is seasonal in character. It is the highest
during March-April-May, when land has to be prepared for
monsoon sowing and also in the harvest season (Sept.-Oct.) when
the rate goes as high as 40 per cent.
7.4 LABOR TURNOVER
It refers to the rate at which employees leave employment. Labour
turnover can be evaluated by relating the number of employees leaving
their employment during a period of time to the total or average numbers
employed in that period.
Generally, it is measured by the following formula:
7.5. CAUSES OF LABOUR TURNOVER

Avoidable causes are:
i. Lower wages.
ii. Bad working conditions.
iii. Unsympathetic attitude of the management.
iv. Lack of opportunities for promotion.
v. Lack of proper training.
vi. Improper manpower planning.
vii. Lack of proper incentives.
viii. Bitter relationship between management and workers
ix. Lack of conveyance, accommodation, medical and educational
facilities and recreational
7.6. MEASURES TO CONTROL EMPLOYEE ABSENTEEISM
7.6.1. Proper Working Conditions: The workers feel fatigued after a

short period of work if there is insanitation, noise, dust, dampness, etc.
There should be proper facilities at work. There should be a provision of
drinking water, canteen, rest places, lavatories etc., so that workers do
not feel tired at workplace.
7.6.2. Proper Selection Procedure: Absenteeism may also result if there
is no proper recruitment and selection. When the workers are not well
suited for the jobs, then they will try to be absent themselves. There
should be aptitude training, intelligence tests for finding out the suitability
of persons for the jobs they are being selected. When the job is suitable
for the worker, then he will enjoy working on it and will not think of
absenting himself.
70
7.6.3. Reasonable Wage Rates: The wage rates should be fixed by
taking into account the requirements of workers. The wages should be
sufficient to enable workers to maintain reasonable standards of living.
7.6.4. Maintaining Discipline: There should be well-defined rules and
regulations for work. The employees should not be allowed to violate
various regulations.
LET US SUM UP
In this unit, you have learnt about the absent employees affect a
company's productivity, turnover and costs. Absenteeism contributes to
employee turnover, increased labor costs when replacements must be
hired, and other management and hiring costs. It heightens employers'
liabilities in the form of additional labor costs that they need to endure to
cover the lost productivity due to the absent employees' missed work
hours. It also increases the workload on the remaining workforce, which
later turns up as workplace dissatisfaction and other such related issues.
More often than not, other workers need to pick up the slack for the absent
worker. Putting in this extra effort could result in a dip in productivity,
efficiency, employee engagement and burnout. Absence management
could prevent all this and also minimize the financial implications of
employees missing work.
CHECK YOUR PROGRESS
1. Who manage the crucial functions for the company’s survival?
a) line manager
b) staff manager
c) financial manager
d) both A and B
2. ___________ is the division of the total task to be performed into a
manageable and efficient unit.
a) a job designs
b) a job analysis
c) a job specification
d) a job description
71
3. During the lay off period, how much employer has to pay of the basic
wages.
a) One fourth
b) One third
c) Three fourth
d) Half
4. A job analyst’s task is to _________________.
a) advise management
b) integrate development activities
c) develop compensation plans
d) prepare job description
GLOSSARY
Wage Rates : Wage rates measure the basic

remuneration per time unit or unit of output
Unsympathetic : Unsympathetic means not sharing the

attitude feelings of someone or identifying with,
caring about, or having any favor or support
for someone or something.
SUGGESTED READINGS
1. Raymond Toga · 2013 ·: Absenteeism Turnover, Lap Lambert
Academic Publishing GmbH KG
WEB RESOURCES
1. Staff Retention and Labour Turnover - Bing video
2. Employee Absenteeism - Bing video
3. MBA 101 Strategic HRM, Turnover & Retention - Bing video
4. High Employee Turnover in a Nutshell | AIHR Learning Bite - Bing
video
ANSWERS TO CHECK YOUR PROGRESS

1.a) 2.a) 3.d) 4.d)
72
UNIT 8
RECRUITMENT AND SELECTION
STRUCTURE
Overview
Learning Objectives
8.1 Recruitment & Selection
8.2 Recruitment Policy
8.3 Factors affecting internal recruitment

8.4 Source of Recruitment
8.4.1. Internal Sources
8.4.2. External Sources
8.5 Recruitment Process in India
8.6 Selection
8.7 Placement and Induction
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
OVERVIEW
Recruitment refers to the process of identifying, attracting, interviewing,
selecting, hiring and onboarding employees. Recruitment is a process of
finding and attracting potential resources for filling up the vacant positions
in an organization. It sources the candidates with the abilities and attitude
which are required for achieving the objectives of an organization.
Recruitment process is a process of identifying the jobs vacancy,
analyzing the job requirements, reviewing applications, screening,
shortlisting and selecting the right candidate.
To increase the efficiency of hiring, it is recommended that the HR team

of an organization follows the five best practices. In this unit, you will study
the recruitment and selection process of the organizations.
73
LEARNING OBJECTIVES
After studying this unit, you should be able to:
• Gain knowledge on and the recruitment process
• discuss about selection concept in organization
• explain the different types of recruitment and policies.
8.1 RECRUITMENT AND SELECTION
Recruitment forms a step in the process which continues with selection
and ceases with the placement of the candidate. It is the next step in the
procurement function, the first being the manpower planning. Recruiting
makes it possible to acquire the number and types of people necessary
to ensure the continued operation of the organisation. Recruiting is the
discovering of potential applicants for actual or anticipated organisational
vacancies.
Recruitment refers to the process of identifying, attracting, interviewing,
selecting, hiring and on boarding employees. In other words, it involves
everything from the identification of a staffing need to filling it.
Depending on the size of an organization, recruitment is the responsibility
of a range of workers. Larger organizations may have entire teams of
recruiters, while others only a single recruiter. In small outfits, the hiring
manager may be responsible for recruiting. In addition, many
organizations outsource recruiting to outside firms. Companies almost
always recruit candidates for new positions via advertisements, job
boards, social media sites, and others. Many companies utilize recruiting
software to more effectively and efficiently source top candidates.
Regardless, recruitment typically works in conjunction with, or as a part of
Human Resources.
Human Resource Management, otherwise known as HRM or HR for short,
is the function of people management within an organization. HR is
responsible for facilitating the overall goals of the organization through
effective administration of human capital — focusing on employees as the
company's most important asset.
Recruitment is the first step in building an organization's human capital.
At a high level, the goals are to locate and hire the best candidates, on
time, and on budget.
There are several types of recruiting. Here’s an overview:
• Internal Recruiting: internal recruiting involves filling vacancies
with existing employees from within an organization.
74
• Retained Recruiting: When organization hire a recruiting firm,
there are several ways to do so; retained recruiting is a common
one. When an organization retains a recruiting firm to fill a
vacancy, they pay an upfront fee to fill the position. The firm is
responsible for finding candidates until the position is filled. The
organization also agrees to work exclusively with the firm.
Companies cannot, in other words, hire multiple recruiting firms to
fill the same position.
• Contingency Recruiting: like retained recruiting, contingency
recruiting requires an outside firm. Unlike retained recruiting, there
is no upfront fee with contingency. Instead, the recruitment
company receives payment only when the clients they represent
are hired by an organization.
• Staffing Recruiting: staffing recruiters work for staffing agencies.
Staffing recruiting matches qualified applicants with qualified job
openings. Moreover, staffing agencies typically focus on short-
term or temporary employment positions.
• Outplacement Recruiting: outplacement is typically an
employer-sponsored benefit which helps former employees
transition into new jobs. Outplacement recruiting is designed to
provide displaced employees with the resources to find new
positions or careers.
• Reverse Recruiting: refers to the process whereby an employee
is encouraged to seek employment with a different organization
that offers a better fit for their skill set. We offer Reverse Recruiting
Days to help workers with this process. At our Reverse Recruiting
Days, we review resumes, conduct mock interviews, and offer
deep dives into specific job roles. Click here for more information.
According to Edwin B. Flippo, “Recruitment is the process of searching
for prospective employees and stimulating them to apply for jobs in the
organisation.”
According to Lord, “Recruitment is a form of competition. Just as
corporations compete to develop, manufacture, and market the best
product or service, so they must also compete to identify, attract and hire
the most qualified people. Recruitment is a business, and it is a big
business.”
8.2. RECRUITMENT POLICY
As Yoder et al observe recruitment policy spells out the objectives of the
recruitment and provides a framework for implementations of the
recruitment programme in the form of procedures.
75
It may involve a commitment to broad principles such as filling vacancies
with the best qualified individuals. The recruitment policy may embrace
several issues such as the extent of promotion from within, attitudes of
enterprise in recruiting old, handicapped, and minor individuals, minority
group members, part-time employees and relatives of present employees.
In addition, the recruitment policy may also involve the organisation
system to be developed for implementing the recruitment programme and
procedures to be employed. Explicitly, an organisational system is a
function of the size of an enterprise. In smaller enterprises, there may be
merely informal recruiting procedures and the line official may be
responsible to handle this function along with their usual responsibilities.
On the other hand, in larger organisations, there is usually a staff unit
attached with personnel or an industrial relations department designated
as employment or recruitment office.
This specialisation of recruitment enables staff personnel to become
highly skilled in recruitment techniques and their evaluation. However,
recruitment remains the line responsibility as far as the personnel
requisition forms are originated by the line personnel, who have also the
final word in the acceptance or rejection of a particular applicant. Despite
this, the staff personnel have adequate freedom in respect of sources of
manpower to be tapped and the procedure to be followed for this purpose.
According to Yoder, “the recruitment policy is concerned with quantity and

qualifications of manpower.” It establishes broad guidelines for the staffing
process. Generally, the following factors are involved in a recruitment
policy:
• To provide each employee with an open road and encouragement
in the continuing development of his talents and skills.
• To provide individual employees with the maximum of employment
security, avoiding, frequent lay-off or lost time.
• To avoid cliques which may develop when several members of the
same household or community are employed in the organisation.
• To carefully observe the letter and spirit of the relevant public
policy on hiring and, on the whole, employment relationship.
• To assure each employee of the organisation interest in his
personal goals and employment objective.
• To assure employees of fairness in all employment relationships,
including promotions and transfers.
• To provide employment in jobs which are engineered to meet the
qualifications of handicapped workers and minority sections; and
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• To encourage one or more strong, effective, responsible trade
unions among the employees.
8.3 FACTORS AFFECTING INTERNAL RECRUITMENT
The factors affecting recruitment can be classified as internal and external
factors. The internal factors are:
• Wage and salary policies.
• The age composition of existing working force.
• Promotion and retirement policies.
• Turnover rates.
• The nature of operations involved the kind of personnel required.
• The level and seasonality of operations in question.
• Future expansion and reduction programmes.
• Recruiting policy of the organisation.
• Human resource planning strategy of the company.
• Size of the organisation and the number of employees employed.
• Cost involved in recruiting employees, and finally.
• Growth and expansion plans of the organisation.
The external factors are:
• Supply and demand of specific skills in the labour market.

• Company’s image perception of the job seekers about the
company.
• External cultural factors: Obviously, the culture may exert
considerable check on recruitment. For example, women may not
be recruited in certain jobs in industry.
• Economic factors: such as a tight or loose labour market, the
reputation of the enterprise in the community as a good pay master
or otherwise and such allied issues which determine the quality
and quantity of manpower submitting itself for recruitment.
• Political and legal factors also exert restraints in respect of nature
and hours of work for women and children, and allied employment
practices in the enterprise, reservation of Job for SC, ST and so
on.
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8.4. SOURCE OF RECRUITMENT
Fig 8.1: Sources of Recruitment

8.4.1. Internal Sources
Best employees can be found within the organisation… When a vacancy
arises in the organisation, it may be given to an employee who is already
on the payroll. Sources include promotion, transfer and in certain cases
demotion. When a higher post is given to a deserving employee, it
motivates all other employees of the organisation to work hard. The
employees can be informed of such a vacancy by internal advertisement.
1. Transfers
Transfer involves shifting of persons from present jobs to other similar
jobs. These do not involve any change in rank, responsibility or prestige.
The numbers of persons do not increase with transfers.
2. Promotions
promotions refer to shifting of persons to positions carrying better prestige,
higher responsibilities and more pay. The higher positions falling vacant
may be filled up from within the organisation. A promotion does not
increase the number of persons in the organisation.
A person going to get a higher position will vacate his present position.
Promotion will motivate employees to improve their performance so that
they can also get promotion.
3. Present Employees
The present employees of a concern are informed about likely vacant
positions. The employees recommend their relations or persons intimately
known to them. Management is relieved of looking out prospective
candidates.
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The persons recommended by the employees may be generally suitable
for the jobs because they know the requirements of various positions. The
existing employees take full responsibility of those recommended by them
and also ensure of their proper behaviour and performance.
8.4.2. External Sources
All organisations have to use external sources for recruitment to higher
positions when existing employees are not suitable. More persons are
needed when expansions are undertaken.
1. Advertisement
It is a method of recruitment frequently used for skilled workers, clerical
and higher staff. Advertisement can be given in newspapers and
professional journals. These advertisements attract applicants in large
number of highly variable quality.
Preparing good advertisement is a specialised task. If a company wants
to conceal its name, a ‘blind advertisement’ may be given asking the
applicants to apply to Post Bag or Box Number or to some advertising
agency.
2. Employment Exchanges
Employment exchanges in India are run by the Government. For unskilled,

semi-skilled, skilled, clerical posts etc., it is often used as a source of
recruitment. In certain cases, it has been made obligatory for the business
concerns to notify their vacancies to the employment exchange. In the
past, employers used to turn to these agencies only as a last resort. The
job-seekers and job-givers are brought into contact by the employment
exchanges.
3. Schools, Colleges and Universities
Direct recruitment from educational institutions for certain jobs (i.e.
placement) which require technical or professional qualification has
become a common practice. A close liaison between the company and
educational institutions helps in getting suitable candidates. The students
are spotted during the course of their studies. Junior level executives or
managerial trainees may be recruited in this way.
4. Recommendation of Existing Employees
The present employees know both the company and the candidate being
recommended. Hence some companies encourage their existing
employees to assist them in getting applications from persons who are
known to them.
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In certain cases, rewards may also be given if candidates recommended
by them are actually selected by the company. If recommendation leads
to favouritism, it will impair the morale of employees.
5. Factory Gates
Certain workers present themselves at the factory gate every day for
employment. This method of recruitment is very popular in India for
unskilled or semi-skilled labour. The desirable candidates are selected by
the first line supervisors. The major disadvantage of this system is that the
person selected may not be suitable for the vacancy.
6. Casual Callers
Those personnel who casually come to the company for employment may
also be considered for the vacant post. It is most economical method of
recruitment. In the advanced countries, this method of recruitment is very
popular.
7. Central Application File
A file of past applicants who were not selected earlier may be maintained.
In order to keep the file alive, applications in the files must be checked at
periodical intervals.
8. Labour Unions
In certain occupations like construction, hotels, maritime industry etc.,
(i.e., industries where there is instability of employment) all recruits usually
come from unions. It is advantageous from the management point of view
because it saves expenses of recruitment. However, in other industries,
unions may be asked to recommend candidates either as a goodwill
gesture or as a courtesy towards the union.
9. Labour Contractors
This method of recruitment is still prevalent in India for hiring unskilled and
semi-skilled workers in brick klin industry. The contractors keep
themselves in touch with the labour and bring the workers at the places
where they are required. They get commission for the number of persons
supplied by them.
10. Former Employees
In case employees have been laid off or have left the factory at their own,
they may be taken back if they are interested in joining the concern
(provided their record is good).
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8.5 RECRUITMENT PROCESS IN INDIA
Technology is changing the world and recruitment process is no different.
Technology is changing the way a recruiter hires someone and is making
the process more efficient than ever before. How is technology changing
the recruitment process and what trends do we see in this regard? Let’s
find out by having a look at recent trends in recruitment practices right
here.
• Outsourcing
Outsourcing firms build up their human asset pool by utilizing
individuals for them and make accessible work force to different
organizations according to their necessities. As result, the
outsourcing firms or the intermediaries charge the organizations
their services cost.
• E - Recruitment
E-recruitment is a smart use of technology to accelerate the
recruitment process. Many big organizations use Internet as a
source of recruitment. They advertise job vacancies through
worldwide web. The job seekers send their applications or
curriculum vitae i.e., CV or resume through e mail using the
Internet. Either job seekers place their CV or resumes over
internet, job portal, apply through company webpage, which can
be drawn by prospective employees depending upon their
requirements.
• Use of Virtual Reality
One of the new trends in recruitment and selection is the use of
virtual reality to boost a job seeker's profile or to let a candidate
explore how working in a job would be like. Thanks to virtual
reality, a job seeker can enhance his or her profile to let a recruiter
walk through the projects that were successfully completed by a
candidate. In contrast, the recruiter can help explain the benefits
of taking up the job to a candidate by giving a VR tour that lets a
jobseeker understand workplace and code of conduct of an
organization.
• Video Profiles
A key one among 2021 recruitment trends is that a candidate can
now use video content to enhance his or her professional profiles.
Many candidates are adding a brief video of their professional
accolades on professional networking platforms like LinkedIn to
ensure that a recruiter doesn’t have to spend a lot of time in finding
and then reading up on what a candidate can offer.
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Social Media Recruitment is on a New High
Fig 8.2: social media

Technology has made us so close to one another via social media
platforms that we can communicate with anyone across the planet
by just signing into a social media platform. Recruiters are making
the most of this by devising new recruitment strategies and
searching for candidates on social media platforms. Apart from
giving them an idea of the professional qualifications of a
candidate, it helps a recruiter to understand the personal interest
and family priorities of the candidate a swell which later helps in
attaining a great work-life balance. This is among recruitment best
practices because it allows an employee to feel at home from day
one as the organization is prepared to meet his or her needs.
8.6. SELECTION
Selection is the process of choosing qualified individuals who are
available to fill positions in an organization. In the ideal personnel
situation, selection involves choosing the best applicant to fill a position.
Selection is the process of choosing people by obtaining and assessing
information about the applicants with a view to matching these with the
job requirements. It involves a careful screening and testing of candidates
who have put in their applications for any job in the enterprise. It is the
process of choosing the most suitable persons out of all the applicants.
The purpose of selection is to pick up the right person for every job.
But selecting the most suitable candidate for a job is never an easy task
as it becomes very difficult to screen candidates and fill vacancies that are
very important for the organisation. It is because the faulty selection of
employees may adversely impact the performance of the organisation.
The Human Resources department initiates the next step in the selection
process to select the best candidate for the job. The basic aim of this
process is to find the best candidate for the jobs that fall vacant. Through
the selection procedure, the suitable employees and less suitable ones
are identified.
In simple terms, the selection is a systematic procedure to identify suitable
candidates for the jobs in the organisation from the available applicant
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pool. David Decenzo defined it as, “Selection is a managerial decision-
making process to predict which job applicants will be successful if hired.”
Selection is the process by which candidates for employment are divided
into two classes those who will be offered employment and those who will
be not. By Dale Yoder.
David Decenzo defined it as, “Selection is a managerial decision-making
process to predict which job applicants will be successful if hired.”
According to Thomas H. Stone, “Selection is the process of differentiating
between applicants in order to identify (and hire) those with a greater
likelihood of success in a job.”
According to Dale Yoder, “Selection is the process in which candidates
for employment are divided into two classes-those who are to be offered
employment and those who are not”.
8.6.1. Selection Process
Every organisation creates a selection process because they have their
own requirements. Although, the main steps remain the same. So, let’s
understand in brief how the selection process works.
Fig 8.3: selection process

• Preliminary Interview
This is a very general and basic interview conducted so as to
eliminate the candidates who are completely unfit to work in the
organisation. This leaves the organisation with a pool of potentially fit
employees to fill their vacancies.
• Receiving Applications
Potential employees apply for a job by sending applications to the
organisation. The application gives the interviewers information
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about the candidates like their biodata, work experience, hobbies and
interests.
• Screening Applications
Once the applications are received, they are screened by a special
screening committee who choose candidates from the applications
to call for an interview. Applicants may be selected on special criteria
like qualifications, work experience etc.
• Employment Tests
Before an organisation decides a suitable job for any individual, they
have to gauge their talents and skills. This is done through various
employment tests like intelligence tests, aptitude tests, proficiency
tests, personality tests etc.
• Employment Interview
The next step in the selection process is the employee interview.
Employment interviews are done to identify a candidate’s skill set and
ability to work in an organisation in detail. Purpose of an employment
interview is to find out the suitability of the candidate and to give him
an idea about the work profile and what is expected of the potential
employee. An employment interview is critical for the selection of the
right people for the right jobs.
• Checking References
The person who gives the reference of a potential employee is also
a very important source of information. The referee can provide info
about the person’s capabilities, experience in the previous
companies and leadership and managerial skills. The information
provided by the referee is meant to kept confidential with the HR
department.
• Medical Examination
The medical exam is also a very important step in the selection
process. Medical exams help the employers know if any of the
potential candidates are physically and mentally fit to perform their
duties in their jobs. A good system of medical check-ups ensures that
the employee standards of health are higher and there are fewer
cases of absenteeism, accidents and employee turnover.
• Final Selection and Appointment Letter
This is the final step in the selection process. After the candidate has
successfully passed all written tests, interviews and medical
examination, the employee is sent or emailed an appointment letter,
confirming his selection to the job. The appointment letter contains
all the details of the job like working hours, salary, leave allowance
etc. Often, employees are hired on a conditional basis where they are
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hired permanently after the employees are satisfied with their
performance.
8.7. PLACEMENT AND INDUCTION
After an employee has been recruited, he is provided with basic
background information about the employer, working conditions and the
information necessary to perform his job satisfactorily. The new
employee’s initial orientation helps him perform better by providing him
information of the company rules, and practices.
Placement is a process of assigning a specific job to each of the selected
candidates. It involves assigning a specific rank and responsibility to an
individual. It implies matching the requirements of a job with the
qualifications of the candidate. Placement is understood assigning jobs to
the selected candidates. Assigning jobs to employees may involves a new
job or different jobs. Thus, placement may include initial assignment of job
to new employee, on transfer, promotion or demotion of the present
employees.
According to Pigors and Myers, “Placement consists in matching what
the supervisor has reason to think the new employee can do with what the
job demands (job requirements), imposes (in strain, working conditions,
etc.), and offers (in the form of pay rate, interest, companionship with
other, promotional possibilities, etc.)” They further state that it is not easy
to match all these factors for a new worker who is still in many ways an
unknown quantity. For this reason, the first placement usually carries with
it the status of probationer.
A few basic principles should be followed at the time of placement of an
employee on the job. These may be enumerated as below:
• The job should be offered to the man according to his qualifications.
The placement should neither be higher nor lower than the
qualifications.
• While introducing the job to the new employee, an effort should be
made to develop a sense of loyalty and cooperation in him so that
he may realise his responsibilities better towards the job and the
organisation.
• The employee should be made conversant with the working
conditions prevailing in the industry and all things relating to the
job. He should also be made aware of the penalties if he commits
a wrong.
• Man should be placed on the job according to the requirements of
the job. The job should not be adjusted according to the
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qualifications or requirements of the man. Job first; man next,
should be the principle of placement.
• The placement should be ready before the joining date of the newly
selected person.
• The placement in the initial period may be temporary as changes
are likely after the completion of training. The employee may be
later transferred to the job where he can do better justice.
The following are the steps in induction process:
1) Welcoming the New Employees
The first fundamental step in induction is welcoming the new
employees as soon as he joins the organizations and is duly placed
on the job and gives basic instruction.
2) Induction with Immediate Superior
After welcome of the new employees, the next step is to introduce
him with his immediate superior or with his colleagues and briefly
explains his duties, responsibilities authorities, work procedure and
practices.
3) To Impart Detail Instructions
The third and last important step in induction is to give detail
information about the company such as company policies, plans,
targets objectives, goals, products services, future prospects,
working environment, future facilities, salary structure promotional
opportune his job and form’s opinion about it, of course which is
positive and starts integrating himself with the organization his job
and the environment.
Induction takes place sometimes within one week to six months from the
time of the initial hiring and orientation. It is generally conducted either by
foreman or a specialist. Its main purpose is to find out whether the
employee is reasonably satisfied or not.
LET US SUM UP
Recruiting is the positive process of identifying, interviewing and hiring
employees for jobs. When more people apply for a position, there will be
more opportunities to hire the right candidate. This is also why diversity is
important in the recruitment process.
On the other hand, job seekers are seeking organisations that might
employ them. Recruitment is a linking activity that connects people who
are employed and those who are looking for a job. In simple terms,
recruiting is the process of identifying sources from which potential
workers may be chosen. Higher productivity, better pay, good
86
morale, lower labour turnover, and a better reputation are all benefits of a
scientific recruitment process. It encourages people to apply for
employment, which is a positive process.
The process of recruitment largely varies due to the size of the
organisation. A small or medium-sized firm may have only one person as
a recruiter or a hiring manager. However, a larger company is most likely
to have a whole dedicated team of recruiters to carry on the process
effectively. A well-framed recruitment process helps both the company
and the applicants. The company gets to generate a potential pool of
candidates whereas the candidates get potential employment
opportunities. It hopes that you have learnt about the recruitment and
selection of employees in the organsiations to reach the desired goals
CHECK YOUR PROGRESS
1. Which of these is the purpose of recruitment?
a) Make sure that there is match between cost and benefit

b) Help increase the success rate of the selection process by
reducing the number of visibly underqualified or overqualified job
applicants.
c) Help the firm create more culturally diverse work – force
2. The poor quality of selection will mean extra cost on _______ and
supervision.
a) Training
b) Recruitment
c) Work quality
3. Which of these is the most important external factor governing
recruitments?
a) Sons of soil
b) Labour market
c) Unemployment rate
d) Supply and demand
4. Which of the following act deals with recruitment and selection?
87
a) Child labour act
b) The apprentices act
c) Mines act
d) All of the above
GLOSSARY
Virtual Reality : Virtual reality (VR) is a simulated experience that

employs pose tracking and 3D near-eye displays
to give the user an immersive feel of a virtual
world.
E-Recruitment : E-recruitment is an umbrella term for any

electronic-based recruiting and recruitment
management activity
Video Profile : A profile video is a short video with a duration of

1 to 2 minutes that gives an overview of your
personal brand.
SUGGESTED READINGS
1) Aswathappa,K (2011) “Human Resource Management, Text and
2) Anjali Ghanekar, (2010), “Essentials of Human Resource
Management”, latest Edition, Everest Publishing House, New Delhi
WEB RESOURCES
1. Recruitment in HRM | Factors , Recruitment process | Recruitment
methods - Bing video
2. Recruitment, Selection and Training of Workers - Bing video
3. The recruitment and selection process - Bing video
4. What is The Meaning of Recruitment? |What is Recruitment
Process| Explained In A Simple Way | Easy! - Bing video
5. Selection in HRM - YouTube
1. b) 2. a) 3. d) 4. d)
88
UNIT 9
DEMOTION AND SEPARATION
STRUCTURE
Overview
Learning Objectives
9.1 Demotion
9.2 Types of Demotion
9.2.1 Voluntary Demotion
9.2.2 Involuntary Demotion
9.3 Causes of Demotion
9.4 Separation
9.5 Types of Separation
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The reassignment of an employee to a lower job involving fewer skills and
responsibilities. The movement of an employee to a less important job
from a higher-level job in the organization may not involve a reduction in
pay but a reduction in status or privileges. Reorganizations, company
mergers or business contractions may result in fewer jobs, forcing some
employees to accept lower positions. Inability of the employees to
perform their jobs according to acceptable standards. As a form of
disciplinary action or a way to handle disciplinary problems, also viewed
as a routine form of punishment for wrongdoing. The tool is used to
communicate to employees that they are beginning to be “liabilities” rather
than assets to an organization. In this unit you will learn about the
demotion and separation of the employees in the organization.
LEARNING OBJECTIVES

• explain the meaning of demotion and separation.
• discuss the advantages and disadvantages demotion
• examine the causes of separation
• explore the different types of separation.
89
9.1. DEMOTION
Demotion is the reverse of promotion. It is the downward movement of an
employee in hierarchy with lower status, salary and decreased
responsibilities. It is generally used as a punitive measure for
incompetence or a preliminary step to dismissal. It is a downgrading
process where the employees suffer considerable emotional and financial
loss.
9.2. TYPES OF DEMOTION
9.2.1. Voluntary Demotion
Voluntary demotion occurs when employees decide to lessen their
responsibilities or work part-time to accommodate their personal
circumstances.
9.2.1. Involuntary Demotion
When a demotion is initiated by the company, it is called involuntary
demotion
9.3. CAUSES OF DEMOTION
Fig 9.1 Causes of demotion

• Lack of workplace discipline.
• Inadequate knowledge of the assigned work/designation.
• Organizational Restructuring.
• Declining performance.
• Violation of company rules.
• Improper work ethics.
9.4 SEPARATION
Employee separation occurs when employees cease to be a member of
an organization. Agreement between employer & employee comes to an
90
end. Employees decide to leave the organization or organization ask
employee to leave. Reasons for employee separations are voluntary or
involuntary. In the former initiation for separation is taken by employee
himself or herself. Where the employer initiates to separate an employee,
it becomes involuntary separation.
9.5 TYPES OF SEPARATION
• Resignation
In most cases, employees voluntarily resign organization
employment. Employees voluntary resigning should provide you
with a written letter of resignation. While resignation is voluntary, you
should remember to acknowledge receipt of a letter of resignation
right away. Accept the resignation by writing “Accepted” with an
effective date and signing your name and date on the original (copy
to employee). Once accepted, an employee may not rescind the
resignation without management’s agreement.
• Retirement
An employee’s decision to retire is entirely voluntary. However, an
employee’s retirement decision does not automatically terminate
organization employment. Retiring employees must also submit a
letter of resignation to the home department.
• Probationary Releases and Extensions
Probationary employees are at-will and may be released during
probation. You are encouraged to contact Employee Relations as
soon as you begin having concerns about a probationary employee.
The decision to release an employee should be reviewed prior to the
end of the probationary period with Employee & Labor Relations.
• Termination for Cause
Career employees may be terminated at the conclusion of the
progressive discipline process for failure to improve attendance,
conduct and/or performance. Career employees may be terminated
without previous disciplinary action due to serious misconduct. In
any circumstance, termination of a career employee must be
reviewed and approved in advance by Employee and Labor
Relations.
• Termination of Employment Contracts
Contract employees are at-will and the terms for termination should
be provided in the employment contract. A decision to release a
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contract employee prior to the normal termination date of a contract,
or non-renewal of a long-term contract employee, should be
reviewed in advance with Employee and Labor Relations.
LET US SUM UP
In this unit you have learnt about the demotion and separation of the
employees in the organization. Demotion is the lowering of a rank,
reduction in salary, status and responsibilities. It may be defined as the
assignment of an individual to a job of lower rank and pay usually involving
a lower level of authority and responsibility. Unless employees are
protected by contract, employers are not required to give a specific reason
for a demotion or alteration of an employee's position. Employers can
demote or fire their workers at will, so long as they comply with other
worker protection laws.
CHECK YOUR PROGRESS

1. Which is considered a voluntary separation?
a) Transfer
b) Lay off
c) Retirement
d) Resignation
2. Which is the process of helping new employees adjust to a company?
a) Training
b) Recruitment
c) Human Resource Management
d) Orientation
3. Movement to a higher level or Position

a) Demotion
b) Promotion
c) Transfer
d) Termination
4. An employee’s movement to another position but within the same
rank or responsibility
a) Promotion
b) Demotion
c) Transfer
d) Separation
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5. A training that gives employees the opportunity to experience other
tasks that require the same skills
a) Monitoring
b) Job Rotation
c) Coaching
d) Total Quality Management
GLOSSARY
Transfer : Transfer is the process of horizontal

movement of an employee, wherein there is a
change in the job, without any changes or
revision in the remuneration, pay, and
modification of responsibilities.
Promotion : Promotions refer to the entire set of activities,

which communicate the product, brand or
service to the user
Demotion : A demotion is a change of an employee from

one position to another position, which is in a
class with a lower salary range maximum.
SUGGESTED READINGS
1. Adrian Wilkinson , Nicolas Bacon ,Scott Snell & David Lepak,
(2019), “ Human Resource Management , SAGE Publications Ltd.
2. Phil B Beaumont(2012), “ Human Resource Management: Key
Concepts and Skills”, Sage Publication LtD.,
WEB RESOURCES
1. Human Resource Management | Demotion And Separation| AKTU
Digital Education - Bing video
2. Separation (HRM) - Bing video
3. Employee Separation - Bing video

1. d) 2. d) 3. b) 4. c) 5. b)
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BLOCK 3
TRAINING AND DEVELOPMENT
Unit 10. Training and Development
Unit 11. Concept Management Development

Programme
Unit 12. Techniques of Training and Development
Unit 13. Stages of Career Development
94
UNIT 10
TRAINING AND DEVELOPMENT
STRUCTURE
Overview
Learning Objectives
10.1 Training & Development – Meaning
10.1.1 Benefits of Training Programme
10.1.2 Purpose of Training Programme
10.1.3 Need of Training Programme importance
10.1.4 Importance of Training Programme
10.2 Steps in Training Programme

10.3 Evaluation of Training program
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
In this unit, you will learn about the training which refers to the acquisition
of knowledge, skills, and competencies as a result of the teaching of
vocational or practical skills and knowledge that relate to specific useful
competencies. It forms the core of apprenticeships and provides the
backbone of content at institutes of technology (also known as technical
colleges or polytechnics). In addition to the basic training required for a
trade, occupation or profession, observers of the labour-market recognize
as of the need to continue training beyond initial qualifications, to maintain,
upgrade and update skills throughout working life. People within many
professions and occupations may refer to this sort of training as
professional development.
LEARNING OBJECTIVES
• examine the need Training and Development

• discuss about steps involved in training Programme
• gain knowledge on Evaluation of training programme.
95
10.1 TRAINING & DEVELOPMENT - MEANING
Training usually refers to some kind of organized (and finite it time) event
a seminar, workshop that has a specific beginning data and end date. It’s
often a group activity, but the word training is also used to refer to specific
instruction done one on one. Employee development, however, is a much
bigger, inclusive “thing”. For example, if a manager pairs up a relatively
new employee with a more experienced employee to help the new
employee learns about the job, that’s really employee development.
If a manager coaches and employee in an ongoing way, that’s employee
development. Or employees may rotate job responsibilities to learn about
the jobs of their colleagues and gain experience so they might eventually
have more promotion opportunities. That’s employee development.
In other words, employee development is a broader term that includes
training as one, and only one of its methods for encouraging employee
learning.
The important point here is that different activities are better for the
achievement of different results. For example, if the desire is providing an
employee with a better understanding of how the department works, job
rotation might work very well. If the goal is to improve the employee’s
ability to use a computer-based accounting package direct training would
be more appropriate than, let’s say, job rotation.
Training programs can be created independently or with a learning

administration system, with the goal of employee long-term development.
Common training practices include orientations, classroom lectures, case
studies, role playing, simulations and computer-based training, including
e-learning.
Sometimes referred to as Human Resource Development (HRD), most
employee training and development efforts are driven by an organization’s
HRD function. These efforts are roughly divided into two types of
programs.
10.1.1. Benefits of T& D
1) Increased productivity: When employees stay current with new
procedures and technologies, they can increase their overall
output.
2) Reduced micromanagement: If workers feel empowered to
perform a task, they typically require less oversight and work more
independently.
96
3) Train future leaders: Organizations must have a solid pipeline of
well-trained and innovative potential leaders to grow and adapt
over time.
4) Increased job satisfaction and retention: Well-trained
employees gain confidence in their abilities, leading to greater job
satisfaction, a reduction in absenteeism and overall employee
retention.
5) Attract highly skilled employees: Top recruits are attracted to
firms with an identifiable career path based on consistent training
and development.
6) Increased consistency: Well-organized training ensures tasks
are performed uniformly, resulting in tight quality control that end
users can trust.
7) Increased camaraderie: Training and development helps create
a sense of teamwork and collaboration.
8) Bolstered safety: Continuous training and development helps
ensure employees have the knowledge and skills to perform a task
safely.
9) Ability to cross-train: Providing consistent training creates a
knowledgeable team overall where employees can help train or
assist each other as needed.
10) Added innovation: Consistently trained employees can help
develop new strategies and products, contributing to the
company’s bottom line and continued success.
Training and development refer to educational activities within a company
created to enhance the knowledge and skills of employees while providing
information and instruction on how to better perform specific tasks.
Training is a short-term reactive process meant for operatives and
process while development is designed continuous pro-active process
meant for executives. In training employees' aim is to develop additional
skills and in development, it is to develop a total personality.
In training, the initiative is taken by the management with the objective of
meeting the present need employee. In development, initiative is taken by
the individual with the objective to meet the future need employee.
10.1.2. The purpose of training Programme
• Lowers Attrition
Training is one of the best ways to value your employees. It shows
them that you are as invested in their wellbeing and growth as they
are in your growth as a company. Employees who are looked after
will never want to look elsewhere.
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• Prepares for upcoming challenges
Training can be a pre-emptive step to train employees for
expected / unexpected changes in the industry. In times like ours
when trends change constantly under the influence of online
evolution, keeping our teams prepared just makes good sense.
• Fosters Leadership
There is no better way to create future leaders than to train the
best bunch. This will also lead to a clear career path for employees
preventing attrition and dissatisfaction.
• Growth of the company
Any company dedicated to training its workforce will only prosper
and move forward. The employees are a major part of a company's
assets and taking care of them will mean taking care of the
organisation.
10.1.3 Need of the Training Programme
Training of employees takes place after orientation takes place. Training
is the process of enhancing the skills, capabilities and knowledge of
employees for doing a particular job. Training process molds the thinking
of employees and leads to quality performance of employees. It is
continuous and never ending in nature.
Training needs can be assessed by analyzing three major human
resource areas, the organization as a whole, the job characteristics and
the needs of the individuals.
This analysis will provide answers to the following questions:
• Where is training needed?
• What specifically must an employee learn in order to be more
productive?
• Who needs to be trained?
Begin by assessing the current status of the company, how it does what
it does best and the abilities of your employees to do these tasks. This
analysis will provide some benchmarks against which the effectiveness of
a training program can be evaluated. Your firm should know where it
wants to be in five years from its long-range strategic plan. What you need
is a training program to take your firm from here to there. Second, consider
whether the organization is financially committed to supporting the training
efforts. If not, any attempt to develop a solid training program will fail.
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10.1.3 Importance of Training
Training is crucial for organizational development and success. It is fruitful
to both employers and employees of an organization. An employee will
become more efficient and productive if he is trained well.
1. Improves Morale of Employees- Training helps the employee to
get job security and job satisfaction. The more satisfied the
employee is and the greater is his morale, the more he will
contribute to organizational success and the lesser will be employee
absenteeism and turnover.
2. Less Supervision- A well trained employee will be well acquainted
with the job and will need less of supervision. Thus, there will be
less wastage of time and efforts.
3. Fewer Accidents- Errors are likely to occur if the employees lack
knowledge and skills required for doing a particular job. The more
trained an employee is, the less are the chances of committing
accidents in job and the more proficient the employee becomes.
4. Chances of Promotion- Employees acquire skills and efficiency
during training. They become more eligible for promotion. They
become an asset for the organization.
2. Increased Productivity- Training improves efficiency and
productivity of employees. Well trained employees show both
quantity and quality performance. There is less wastage of time,
money and resources if employees are properly trained.
10.2 STEPS IN TRAINING PROGRAMME
The training design process refers to a systematic approach for
developing training programs. It includes the seven steps in this process.
Training is one of the most profitable investments an organization can
make. No matter what business or industry you are in the steps for an
effective training process are the same and may be adapted anywhere. If
you have ever thought about developing a training program within your
organization, consider the following four basic training steps. You will find
that all four of these steps are mutually necessary for any training program
to be effective and efficient.
• Step 1: is to conduct a needs assessment, which is necessary to
identify whether training is needed. This step identifies activities to
justify an investment for training. The techniques necessary for the
data collection are surveys, observations, interviews, and customer
comment cards. Several examples of an analysis outlining specific
training needs are customer dissatisfaction, low morale, low
productivity, and high turnover.
99
• Step 2: is to ensure that employees have the motivation and basic
skills necessary to master training content. This step establishes the
development of current job descriptions and standards and
procedures. Job descriptions should be clear and concise and may
serve as a major training tool for the identification of guidelines.
Once the job description is completed, a complete list of standards
and procedures should be established from each responsibility
outlined in the job description. This will standardize the necessary
guidelines for any future training.
• Step 3: is to create a learning environment that has the features
necessary for learning to occur. This step is responsible for the
instruction and delivery of the training program. Once you have
designated your trainers, the training technique must be decided.
One-on-one training, on-the-job training, group training, seminars,
and workshops are the most popular methods.
• Step 4 is to ensure that trainees apply the training content to their
jobs. This step will determine how effective and profitable your
training program has been. Methods for evaluation are pre-and
post- surveys of customer comments cards, the establishment of a
cost/benefit analysis outlining your expenses and returns, and an
increase in customer satisfaction and profits. The reason for an
evaluation system is simple. The evaluations of training programs
are without a doubt the most important step in the training process.
It is this step that will indicate the effectiveness of both the training
as well as the trainer.
There are several obvious benefits for evaluating a training program. First,
evaluations will provide feedback on the trainer’s performance, allowing
them to improve themselves for future programs. Second, evaluations will
indicate its cost-effectiveness. Third, evaluations are an efficient way to
determine the overall effectiveness of the training program for the
employees as well as the organization. The importance of the evaluation
process after the training is critical. Without it, the trainer does not have a
true indication of the effectiveness of the training. Consider this
information the next time you need to evaluate your training program. Will
be amazed with the results. The need for training your employees has
never been greater. As business and industry continues to grow, more
jobs will become created and available.
Customer demands, employee morale, employee productivity, and
employee turnover as well as the current economic realities of a highly
competitive workforce are just some of the reasons for establishing and
implementing training in an organization. To be successful, all training
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must receive support from the top management as well as from the middle
and supervisory levels of management. It is a team effort and must be
implemented by all members of the organization to be fully successful.
10.3. EVALUATION OF TRAINING PROGRAMMES
1. Identifying What Participants Need for Their Job
Obviously, we need to start out by knowing what we are measuring.
Most likely, you’ll be looking for ways to tie our training efforts to the
attainment, or improvement, of skills needed back on the job. An
important step, therefore, is to determine a measurable list of skills,
knowledge, and abilities needed.
2. Matching Session Learning Objectives with Job Requirements
The next step is to craft the training program in such a way that it’s
actually addressing on-the-job needs. This might sound obvious, but
many companies focus simply on measuring knowledge acquisition
through testing retention of facts. This retention, though, doesn’t
necessarily translate to actually performing a job well.
3. Assessing Performance During and Upon Completing the
Training
“Effective trainers do this by developing one or more assessment tools
for each learning objective,” says one expert. “During the session, we
want to apply a variety of these assessment methods. For example, a
learning objective might be ‘Perform procedure X’ and we may ask
participants to perform the steps of procedure X in order from first to
last.”
This type of assessment can be repeated over time to test retention of
key learning objectives.
4. Evaluating the Training Effort After a Period of Time
This is a key element many companies miss. Asking training session
participants to take a test at the end of a training session doesn’t give
you any idea of how well they retain that knowledge long term. Some
experts recommend having periodic refresher sessions that include
follow-up evaluations to help determine retention and long-term
improvement.
Employee training is a critical component of employee development, but

too many companies put a lot of time and effort into employee training
without having a good idea of how effective it is. It’s like throwing
resources into a black box and hoping something good is happening
inside.
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By effectively measuring the impact of your employee training, you can
make your employee development process much more efficient through
continuous improvements.
LET US SUM UP
In this unit, you have learnt about the HR Training and Development
Manager is responsible for the organization's staff training requirements,
programs, and career development needs. They supervise training staff,
plan and administer training seminars, and manage conflict resolution,
team building, and employee skill evaluations.
Training and development initiatives are educational activities within an
organization that are designed to improve the job performance of an
individual or group. These programs typically involve advancing a
worker's knowledge and skill sets and instilling greater motivation to
enhance job performance.
Training allows employees to acquire new skills, sharpen existing ones,
perform better, increase productivity and be better leaders. Since a
company is the sum total of what employees achieve individually,
organizations should do everything in their power to ensure that
employees perform at their peak.
CHECK YOUR PROGRESS
1. The following is (are) the benefit(s) of training.
a) Increased productivity
b) Reduced accidents
c) Reduced supervision
d) All of the above
2. The following training aims to provide broad training to enable the
trainee to take up a wide variety of tasks within his field of specialization
a) Demonstration
b) On-the-job training
c) Apprenticeship
d) All of the above
3. Demonstration type of training method is used to train
a) Workers
b) Supervision
c) Managers
d) All of the above
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4. Training within the industry (TWI) scheme imparts training in
a) Job instructions
b) Job rotation
c) Job method
d) On job training
5. The following is not a on the job training method
a) Job rotation
b) Job enrichment
c) Management by objectives (MBO)
d) All of the above
GLOSSARY
Training : refers to the acquisition of knowledge, skills,

and competencies as a result of the teaching.
Fosters : Foster Leadership is a young person's

Leadership experience with an adult who creates
meaningful opportunities for them to take on
leadership roles within activities, the classroom,
or a community.
Morale of : Employee morale is the attitude, satisfaction,

Employees and overall outlook of employees during their
association with an organization or a business.
SUGGESTED READINGS
1. IndranilMutsuddi, (2011), “Essentials of Human Resource
Management”, latest Edition, Newage Publishing House, New Delhi.
3. Mamoria, C.B. &V.S.P.Rao, (2012),Personnel Management, latest
Edition, HPH, India
WEB RESOURCES
1. TRAINING & DEVELOPMENT in HUMAN RESOURCE
MANAGEMENT | DEFINITION | PROCESS | EVALUATION | PART
I - Bing video
2. Training and Developing Employees l Human Resource
Management - Bing video
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3. Training and Development | Learning and development | Human
resources training - Bing video
4. HR Basics: Training and Development 2e - Bing video
5. HR Basics: Training and Development - Bing video
6. English for Human Resources: VV 44 - HR Management (2) |
Business English Vocabulary Lessons - Bing video
1. d) 2. c) 3. a) 4. d) 5. b).
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UNIT 11
MANAGEMENT DEVELOPMENT
PROGRAMME
STRUCTURE
Overview
Learning Objectives
11.1 Concept of Management Development Programme
11.1.1 Objectives of a management development
programme
11.1.2 Importance of management development programme
11.2 The level-wise objectives of management development
11.2.1. Top Management
11.2.2. Middle Line Management
11.3 Characteristics of Management Development Programme
11.4 Middle Functional Executive and Specialists

Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
In this unit, you will study about Management development which is the
systematic process of creating effective managers. Managers' critical
function is to translate leadership and shareholder objectives (or create
them on their own when they do not come from above) into legal and
effective actions to achieve those objectives. MDP is the process adopted
to supply knowledge, skills, attitudes, and insights to managerial
personnel, and help them manage their work effectively and efficiently.
Management development is the systematic process of training and
growth with the ultimate purpose of organizational growth. In management
development programmes, the faculty members share their experiences
in organizational context using anecdotes relevant to the development
programmes.
105
LEARNING OBJECTIVES
• gain knowledge on meaning of MDP
• discuss the objectives of management development
• explain the importance of management development
• examine the characteristics of management development.
11.1. CONCEPT OF MANAGEMENT DEVELOPMENT PROGRAMME
Management development is a key component of an organizations effort
to prepare its employee to successfully handle new challenges.
Management development helps managers to understand new cultures
and customs that have become an integral part of the global market.
In human society there is a continuous growth which takes place through
a continuous process of exploration, discovery and acquisition of
knowledge.
Executive or management development is a planned process of learning
and growth designed to bring behavioural change among the executives.
It is continuous process of learning. It implies that there will be a change
in knowledge and behaviour of the individuals undergoing development
programme. The employee will be able to perform his present job better
and will increase his potential for future work.
In the opinion of Molander, “Management development is a conscious and
systematic process to control the development of managerial resources
in the organisation for the achievement of goals and strategies.”
Management development is a part of a large process of development
and learning which a significant area of human development is. In human
society there is a continuous growth which takes place through a
continuous process of exploration, discovery and acquisition of
knowledge.
The main aim of this education is to increase the ability of managers for
betterment. Management development consists of all the means by which
management learn to improve their behaviour and performance.
Those in the field of organizational behaviour tend to be over conscious
of the needs for management development without – paying significant
attention to ensure that the entire segment of industrial and business
activity is viewed as a development process and is attuned to the overall
objectives of the society.
106
It is true that the development of leadership constitutes an important area,
and it has vital links in mobilizing the resources of an organization. It is not
possible to employ resources to organize an all-round developmental
activity immediately, but an organisation tries to apportion to its own
resources in such a long duration.
The systematic process of training by which individuals gain managerial
skills is referred to as management development. In the modern world,
hierarchical organisations tend to rely on management development
programmes to deal with the rapid growth of (or a drastic change in)
business volume. Creating a managerial development programme can
lead to the formation of successful managers who can help the company
move forward. Take a look at to gain a deeper understanding of
programmes and how to design an effective one.
Management or executive development is a prominent area of human
resource management and was previously known as the management
revolution. Management Development Programme (MDP) is a course
designed to strengthen the relationship between managers at all levels
(subordinate to executive management). The aim of this programme is to
transform managers belonging to intermediate management level into
successful leaders. This enables employees at a managerial level to gain
the ability to motivate others, thereby, allowing them to effectively manage
their teams.
11.1.1 Objectives of a management development programme
1. Inducing capabilities to supervise, organise, plan, lead and
motivate thereby, enhancing knowledge and skills.
2. Developing mutual trust, cooperation and understanding to foster
teamwork.
3. Improving decision-making abilities with regards to customer
satisfaction, relation with employees and vendors and productivity
of the organisation.
4. Ensuring personal growth which involves increasing the tenure of
managerial employees and shaping their future career by giving
them the space to grow.
5. Developing succession plans to generate future managerial
positions within the organisation.
6. Preparing new business expansion strategies.
Promoting high morale and good organisational environment to enhance
productivity and profits.
107
11.1.2. Importance of management development programme
1. Allows companies to take a proactive approach towards the
growth of their business.
2. Motivates employees and increases employee retention to build a
knowledge-driven workforce.
3. Develops a team of innovation managers that can lead to business
improvement and product development.
4. Ensures professional development of employees, helping them
improve their skill set by implementing individual or company-wide
training programme.
5. Helps to gain a competitive advantage over other companies with
the support of skilled managers.
6. Promotes management succession planning and encourages staff
development that is essential for the business to move forward
during inevitable situations.
7. Reduces risk and unpredictability related to external recruitment
of managers.
8. Helps to hire appropriate employees in the management cadre.
According to Flippo “Management development includes the process by

which managers and management acquire not only skills and competency
in their present jobs but also capabilities for future managerial tasks of
increasing difficulty and scope.”
The change of attitudes and the eventual change of personality is not a
one-shot approach. It is a long process. Therefore, it requires a planned
approach. Such an approach must be flex-ible enough to accommodate
any internal and external environmental changes. Without such
accommodation, the developmental process may not take root.
11.2 THE LEVEL-WISE OBJECTIVES OF MANAGEMENT
DEVELOPMENT
11.2.1. Top Management
i. To improve thought processes and analytical ability in order to
uncover and examine problems and take decisions in the best
interests of the company.
ii. To broaden the outlook of the executive in regard to his role, position
and responsibilities in the organization and outside.
iii. To think through problems which may confront the organization now
or in the future.
108
iv. To understand economic, technical and institutional forces in order
to solve business problems.
v. To acquire knowledge about the problems of human relations.
11.2.2. Middle Line Management
i. To establish a clear picture of executive functions and
responsibilities.
ii. To bring about an awareness of the broad aspects of management
problems, and an acquaintance with, and appreciation of, inter-
departmental relations.
iii. To develop the ability to analyze problems and to take appropriate
action.
iv. To develop familiarity with the managerial uses of financial
accounting, psychology, business law and business statistics.
v. To inculcate knowledge of human motivation and human
relationships, and
vi. To develop responsible leadership.
11.3. CHARACTERISTICS OF MANAGEMENT DEVELOPMENT
• Continuous Process: Management development is a
continuous process and requires looking after the entire
professional career of managers and executives. In India
management development is considered as a sporadic activity,
resulting in failure to meet the organisational requirements.
• Knowledge updating activity: The need for management
development is imperative and appreciated in filling up gap
between actual and potential performance. Management
development provides scope for continuous improvement in all
functional areas. It bridges the gap by enriching the functional
capacity of executives and managers by continuously updating
their knowledge and skill.
• A vehicle for attitudinal activity: Human behavior is dynamic
and complex. Management development programmes attempt to
understand the behavioral and attitudinal aspects of human
behavior through simulating sessions, ensuring better
interpersonal skill as an important prerequisite for managerial
success.
• Stimulant to higher competence: Managers and executives are
stimulated to bear the intricacies of managerial stress and strain
through different management development programmes in order
to exert their potential for the benefit of the organisation. The
management development programme must be designed
109
considering issues like employees’ motivation, habits, age mix,
pattern of conflict and chaos. and this can enable elevation of
managerial functions of the executives during the post training
phase
• Deficiency improver: Management development programmes
are catered to the individual requirements to improve functional as
well as personal deficiencies of the individual managers, thereby
enabling the organisation to derive immediate benefit from such
programmes.
• A self-development process: Management development
facilitates self-development of managers, as they learn many
things through action learning methods, sharing the experience of
each other in a simulated classroom atmosphere.
11.4. MIDDLE FUNCTIONAL EXECUTIVE AND SPECIALISTS
i. To increase knowledge of business functions and operations in
specified fields in marketing, production, and finance and personnel
management.
ii. To increase proficiency in management techniques (e.g., work
study, inventory control, operations research, and quality control).
iii. To stimulate creative thinking in order to improve methods and
procedures.
iv. To understand the functions performed in a company.
v. To understand human relations problems.
vi. To develop the ability to analyse problems in one’s areas of
functions.
LET US SUM UP
In this unit, you have learnt about the management or executive
development which is an organised and planned process and programme
of training and growth by which individual manager or executive at each
level of management hierarchy gains and applies knowledge, skills,
insights and attitudes to manage workers and the work organisations
effectively. Management Development Programme (MDP) is a course
designed to strengthen the relationship between managers at all levels
(subordinate to executive management). The aim of this programme is to
transform managers belonging to intermediate management level into
successful leaders.
Management development is a part of a large process of development
and learning which a significant area of human development is. In human
society there is a continuous growth which takes place through a
110
continuous process of exploration, discovery and acquisition of
knowledge.
CHECK YOUR PROGRESS
1. Through the development of present employees, the personnel
department reduces the company’s dependence on ___ .
a) present employees
b) hiring new workers
c) vendors
d) all of the above

2- ___ is also an effective way to meet several challenges faced by most
large organizations.
a) Human resource development
b) Human resource management
c) Human resource planning

3. Management development is primarily concerned with improving the
performance of managers by giving them stimulating opportunities for ___
a) growth
b) development
c) growth and development
d) training
4- Which of the following is (are) development concept(s)?
a) Participation is essential for growth
b) Increased understanding of others, their behavioral attitude and
of oneself
c) There is no time limit for learning
d) All of the above
5- Which of the following skill(s) is (are) to be analyzed of a manager?
a) Technical skills
b) Human skills
c) Conceptual skills
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d) All of the above
GLOSSARY
Stimulant to higher : "Stimulate" means to encourage activity,

competence
Deficiency improver : chronic or continuous performance

deficiencies exist when an employee fails to
meet the minimally acceptable standards of
performance for the job over a period of time
SUGGESTED READINGS
1. Kahok, M.A. (2012),Illustrated Case Studies in Indian Management,
2. Mamoria, C.B. &V.S.P.Rao, (2012),Personnel Management, latest
Edition, HPH, India.
WEB RESOURCES
1. MANAGEMENT DEVELOPMENT PROGRAMME - YouTube

2. What is Management Development Programme (MDP) organized by
ICAI? My Journey at MDP, Bangalore! - Bing video
3. MANAGEMENT DEVELOPMENT PROGRAMME - YouTube
1. b) 2. a) 3. c) 4. d) 5. d)
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UNIT 12
TECHNIQUES OF TRAINING AND
DEVELOPMENT
STRUCTURE
Overview
Learning Objectives
12.1 Techniques of Training and Development
12.1.1. Purpose of Training and Development
12.1.2. Importance of Training and Development
12.2 On the Job Training
12.2.1. The procedure of on-the-job training programme
12.3 The four techniques for on-the-job development

12.3.1. Coaching
12.3.2 Mentoring
12.3.3. Job rotation

12.3.4. Job Instruction Technique (JIT)
12.4 Off-the-Job Training
12.4.1. Group Discussion
12.4.2. Conferences and Seminar
12.4.3. Case Studies
12.4.4 Role Playing
12.4.5 Business Games
12.4.6 Sensitivity Training
Let us sum up
Check your progress
Glossary
Suggested Readings
113
OVERVIEW
Training is the process through which employees are made capable of
doing the jobs prescribed to them. It is an act of increasing the knowledge
and skills of an employee for performing the job assigned to him.
However, Development is a long-term educational process by which
managerial personnel learn conceptual and theoretical knowledge for
general purpose. It covers not only those activities which improve job
performance but also those activities which improve the personality of an
employee. Thus, both training and development are equally important for
career progression of an employee. In this unit, you will learn about the
various techniques adopted for effective training and development.
LEARNING OBJECTIVES
• describe the techniques of training
• illustrate the purpose and importance of training
• assess the On-the-job and Off-the-Job training
12.1 TECHNIQUES OF TRAINING AND DEVELOPMENT
Some commentators use a similar term for workplace learning to improve
performance: “training and development”. One can generally categorize
such training as on-the-job or off-the-job.
On-the-job training takes place in a normal working situation, using the
actual tools, equipment, documents or materials that trainees will use
when fully trained. On-the-job training has a general reputation as most
effective for vocational work.
Off-the-job training takes place away from normal work situations —
implying that the employee does not count as a directly productive worker
while such training takes place. Off-the-job training has the advantage that
it allows people to get away from work and concentrate more thoroughly
on the training
Of course, it is beyond the shadow of doubt that the company can only
create the favourable climate for the development of managers.
Ultimately, in any programme of management development, self-
development will be the key-factor to determine the success of the
programme of executive development.
In other words, the participants in this programme must have the capacity
to learn and develop and they must be highly motivated to achieve the
planned objectives. Executive development is the guided self-discovery
and self-development.
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Management development is a systematic process of growth and
development by which the managers develop their abilities to man-age. It
is concerned with not only improving the performance of managers but
also giving them opportunities for growth and develop-ment.
There are two methods through which managers can improve their
knowledge and skills. One is through formal training and other is through
on the job experiences. On the job training is very important since real
learning takes place only when one practices what they have studied.
But it is also equally important in gaining knowledge through classroom
learning. Learning becomes fruitful only when theory is combined with
practice. Therefore, on the job methods can be balanced with classroom
training methods (off-the-job methods).
One excellent study that explores such training methods is “Training
Methods: A Review and Analysis.” It is performed an integrative review of
some of the most popular training methods. In addition to defining the core
methods for training, the study does the following:
Defines the key characteristics of the chosen types of training methods
Researches the conditions in which the training methods are most suitable
Based on the authors’ research questions, the study came up with the
following information that’s crucial for successful training
12.1.1 Purpose of Training and Development
There are many reasons for training and development. Some of these are:
• To ensure that techniques and skills meet current needs
• To ensure that techniques and skills are prepared to meet future
needs
12.1.2. Importance of Training and Development
• It optimises human resource utilization
• It helps in increasing the productivity of the employees
• It helps in inculcating the sense of teamwork, team spirit, and inter-
team collaborations
• It helps to develop and improve the organisational health culture
and effectiveness
• It helps in building the positive perception and feeling about the
organization
• It helps in improving upon the quality of work and work-life
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• It helps in improving the morale of the work force
• It leads to improved profitability and more positive attitudes
towards profit orientation
12.2. ON THE JOB TRAINING
On the job training is characterized by following points
• It is done on ad-hoc manner with no formal procedure, or content
• At the start of training, or during the training, no specific goals or
• objectives are developed.
• Trainers usually have no formal qualification or training experience
for training
• Training is not carefully planned or prepared.
• The trainer is selected on the basis of technical expertise or area
knowledge.
Formal OJT programs are quite different from informal OJT. These
programs are carried out by identifying the employees who are having
superior technical knowledge and can effectively use one-to-one
interaction technique.
12.2.1. The procedure of formal on the job training program is
1. The participant observes a more experienced, knowledgeable,

and skilled trainer (employee)
2. The method, process, and techniques are well discussed before,
during and after trainer has explained about performing the tasks
3. When the trainee is prepared, the trainee starts performing on the
workplace
3. The trainer provides continuing direction of work and feedback
4. The trainee is given more and more work so that he accomplishes
the job flawlessly
12.3 TECHNIQUES FOR ON-THE-JOB DEVELOPMENT
• Coaching
• Mentoring
• Job rotation
• Job Instruction Technique (JIT)
12.3.1. Coaching: is one of the training methods, which is considered as
a corrective method for inadequate performance. According to a survey
conducted by International Coach Federation (ICF), more than 4,000
companies are using coach for their executives. These coaches are
experts most of the time outside consultants. A coach is the best training
plan for the CEO’s because
116
1. It is one to one interaction
2. It can be done at the convenience of CEO
3. It can be done on phone, meetings, through e-mails, chat
4. It provides an opportunity to receive feedback from an expert
5. It helps in identifying weaknesses and focus on the area that
needs improvement
12.3.2 Mentoring
Is an ongoing relationship that is developed between a senior and junior
employee. Mentoring provides guidance and clear understanding of how
the organization goes to achieve its vision and mission to the junior
employee.
12.3.3. Job rotation
Takes on different perspectives. The executive is usually not simply going
to another department. In some vertically integrated organizations, for
example, where the supplier is actually part of same organization or
subsidiary, job rotation might be to the supplier to see how the business
operates from the supplier point of view. Learning how the organization is
perceived from the outside broadens the executive’s outlook on the
process of the organization. Or the rotation might be to a foreign office to
provide a global perspective. For managers being developed for executive
roles, rotation to different functions in the company is regular carried out.
12.3.4. Job Instruction Technique (JIT) uses a strategy with focus on

knowledge (factual and procedural), skills and attitudes development.
This type of training, also known as job instruction training, is the most
commonly used method. Under this method, the individual is placed on a
regular job and taught the skills necessary to perform that job. The trainee
learns under the supervision and guidance of a qualified worker or
instructor.
12.4 OFF-THE-JOB TRAINING
12.4.1. Group Discussion
It is a method used to knowledge and attitudinal development of trainees.
In this method, Image sets of people examine several empirical studies to
find out commonalities to derive the underlying general principles. They
then combine their ideas and focus their attention on a given problem at
a time, speaking from multiple points of view within a group.
An instructor is optional, while a leader is necessary in this method. The
various advantages of the method are that more ideas can be generated
from each session. Moreover, each member gets an opportunity to
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present one’s own ideas and get feedback from members of the same
group.
Peer pressure and commitments made to groups serve to ensure
adherence to decisions jointly taken in the group. As a precaution, care
must be taken to secure the participation of all members and make sure
that a few members do not pre-determine the course of discussions or
dominate
12.4.2. Conferences and Seminar
It is one of the most important forms of group discussion and is more
formal in nature. The seminar enables a study in depth to be made in
specific areas under the guidance of experts. In seminar, the discussion
papers prepared by the participants on the basis of their study and
research are presented, and discussion is based primarily on these
papers.
A seminar may have one or more plenary sessions. This method has the
advantage of pooling together the opinion of a large number of persons.
At the end, some conclusions and recommendations are arrived at, for
taking action.
12.4.3. Case Studies

It is a written down, narrative description of a real situation or incident
relating to an organization and its business, depicting any problem that
participants could face in their employment. Participant trainees are
required to propose any number of viable solutions or decisions that
match the variables represented in the case. Case study can be
interesting and thought stimulating for the participants.
It helps to develop analytical, reasoning and problem-solving skills of the
participants. As it shows and reduces gaps in understanding, a holistic
understanding of reality is made possible through case study method. It
also helps to reemphasize messages provided during lectures, group
discussions and other methods. The disadvantage of the method might
be the difficulty in drawing up an adequate number of stimulating cases
that actually represent the real-life situations of the trainees.
12.4.4 Role Playing
A role is a set of expectations around a given position and is determined
by the role partners. Roles are always reciprocal and described in pairs
such as trainer-trainee, buyer seller, inter viewer-interviewee and so on.
Playing roles would entail practical problems like inter-role conflicts, intra-
role dilemmas, role overloads and role underloads.
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As a result of these hurdles, role confusion ensues. In order to be trained
to perform roles, trainees must attain role clarity. This may involve
negotiation among the role senders and role receivers with regard to their
expectations with counter expectations upon one another. Participants in
role-play method are required to respond to specific problems and
expectations of people that they might actually encounter in their jobs.
Role-playing is often used to teach such skills as interviewing, negotiating,
grievance handling, performance appraisal, and buying and selling and
effective communication. It promotes healthy human relations skills
among people.
12.4.5 Business Games
Are structured and sometimes unstructured, that are usually played for
enjoyment sometimes are used for training purposes as an educational
tool. Training games and simulations are different from work as they are
designed to reproduce or simulate events, circumstances, processes that
take place in trainees’ job.
A Training Game is defined as spirited activity or exercise in which
trainees compete with each other according to the defined set of rules.
Simulation is creating computer versions of real-life games. Simulation is
about imitating or making judgment or opining how events might occur in
a real situation. It can entail intricate numerical modelling, role playing
without the support of technology, or combinations. Training games and
simulations are now seen as an effective tool for training because its key
components are:
• Challenge
• Rules
• Interactivity
Games are used as a training tool, then as mere pastimes or amusement.
Trainees are divided into teams and are given common tasks on which
they would be competing to arrive at decisions, and then jointly
implementing and evaluating the decisions taken with regard to the
games. For example, blocks of wood would be supplied to every team and
one of the members would be blind folded with a piece of cloth. The
person would have to arrange the blocks one above the other, as per the
instructions and guidance of the other members.
As they set on to reach greater target heights, the rewards would also
grow exponentially. This game is used to bring out the nuances of
teamwork, leadership styles and communication patterns exhibited by the
members while playing the game. The demerits of the method are that, at
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times, games might result in lack of seriousness in some trainees and that
the learning is indirect and slow. But it helps to convey messages in a
non-threatening and fun-filled manner.
12.4.6 Sensitivity Training
It is about making people understand about themselves and others
reasonably, which is done by developing in them social sensitivity and
behavioural flexibility. Social sensitivity in one word is empathy. It is ability
of an individual to sense what others feel and think from their own point of
view. Behavioural flexibility is ability to behave suitably in light of
understanding.
Sensitivity Training Program requires three steps
It requires that the trainees become aware of the inadequacy of the old
values. This can be done when the trainee faces dilemma in which his old
values is not able to provide proper guidance.
The first step consists of a small procedure:
• An unstructured group of 10-15 people is formed.

• Unstructured group without any objective looks to the trainer for its
guidance.
• But the trainer refuses to provide guidance and assume leadership
Soon, the trainees are motivated to resolve the uncertainty.
• Then, they try to form some hierarchy. Some try assuming
leadership role which may not be liked by other trainees.
• Then, they started realizing that what they desire to do and realize
the alternative ways of dealing with the situation.
LET US SUM UP
in this unit, you have learnt about the various techniques adopted for
effective training and development. Training methods are used for
upgrading and enhance the skill and knowledge of an employee to best
perform an assigned job within the organization. The selection or a
Training Methods are based on the nature of Job, types and the number
of the workers in an organization and the cost involved for choosing a
particular Training Method. The organization can access or choose from
the wide range of Training Methods available for their workers, be it, on
the job or off the job training methods. As mentioned, choosing a Training
Method is based upon the Training need analysis and the training goals.
Every organization provides relevant training methods to improve the
skills and knowledge of the employees. It is generally the function
of HRM department or the training manager to see the necessary skills
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up-gradation required and arrange the appropriate training program for
the employees. As employees are the valuable assets for the organization
it is vital that they should be trained enough and in a proper manner.
CHECK YOUR PROGRESS

1. The phrase "transfer of training" refers to
a) Moving training schedules around to accommodate production

concerns
b) Freely sharing written training material with colleagues
c) Acquiring and evaluating skills during a training course

d) Implementing and maintaining new knowledge and skills back in
the workplace
2. The evolution of training activities has moved towards
a) Specific on the job requirements using technology as the learning
coach
b) Time and motion studies
c) Needs driven by productivity and efficiency concerns
d) Identifying opportunities to build intellectual capital
3. The diagnostic process of needs assessment often starts with

a) A job analysis
b) A gap analysis
c) A concern
d) An organizational audit
4. The following method is used to give to trainees the important
information in permanent form for immediate of future use
a) Lecture methods
b) Conference
c) Written instructional method
d) Training within the industry (TWI)
5. The following is not a on the job training method
a) Understudies
b) Job rotation
c) Management by objectives (MBO)
d) Case study method
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GLOSSARY
Sensitivity Training : Sensitivity training focuses on making

Program employees aware of their attitudes and
behavior toward others
Development of New : With the trainer’s support, trainees begin to

Values examine their interpersonal behaviour and
giving each other feedback.
Refreezing the new : This step depends upon how much

ones opportunity the trainees get to practice their
new behaviours and values at their
workplace.
SUGGESTED READINGS
1. Arora, P.N. & S. Arora, (2007), Statistics for Management, latest
Edition, S. Chand & Company Ltd., New Delhi.
2. Dwiedi, R., (2011), Research Methods in Behaviour Science, latest
Edition, Macmillan India Ltd., New Delhi.
3. Gupta S L (2017), Business Research Methods, latest Edition,
McGraw Hill, India.
WEB RESOURCES
1. TRAINING & DEVELOPMENT in HUMAN RESOURCE
MANAGEMENT | DEFINITION | PROCESS | EVALUATION |
PART I - Bing video
2. METHODS OF TRAINING in HRM | - PART II - Bing video
3. HR: Different Types of Training Methods - Bing video
1. d) 2. a) 3. c) 4. c) 5. d)
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UNIT 13
STAGES OF CAREER DEVELOPMENT
STRUCTURE
Overview
Learning Objectives
13.1 Career Development
13.2 Steps in Career Development
13.3 Reasons for Career Development

13.4 Strategies for Career Development
13.4.1 Individual Strategies
13.4.2 Organizational Strategies
13.5 Five stages in career development
13.5.1. Exploration
13.5.2 Establishment
13.5.3 Mid-Career
13.5.4. Late Career
13.5.5. Decline
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
In this unit, you will learn about the Career development which is the
support an organization provides to employee professional growth,
especially to employees' movement to a new position or project within the
organization. This support often includes coaching, mentoring, skills
development, networking and career pathing. Career development is
about setting goals and acquiring the skills to achieve those goals. Reflect
on who you are and what you ultimately want from your working life.
Research job paths, leverage company resources, and consult with a
mentor. Create a flexible plan and follow it.
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LEARNING OBJECTIVES
After reading this unit, you will be able to:
• explain the concept of career development
• explore the steps involved in career development
• discuss the stages and strategies for career development
13.1 CAREER DEVELOPMENT
• Career development is the series of activities in an on-
going/lifelong process of developing one’s career which includes
defining new goals regularly and acquiring skills to achieve them.
Career development usually refers to managing one’s career in an
intra-organizational or inter-organizational scenario. It involves
training on new skills, moving to higher job responsibilities, making
a career change within the same organization, moving to a
different organization or starting one’s own business.
• Career development is directly linked to the goals and objectives
set by an individual. It starts with self-actualization and self-
assessment of one’s interests and capabilities. The interests are
then matched with the available options.
• The individual needs to train himself to acquire the skills needed
for the option or career path chosen by him. Finally, after acquiring
the desired competency, he has to perform to achieve the goals
and targets set by him.
• Career development is directly linked to an individual’s growth and
satisfaction and hence should be managed by the individual and
not left to the employer. Career development helps an individual
grow not only professionally but also personally. Learning new
skills like leadership, time management, good governance,
communication management, team management etc. also help an
employee develop and shape their career.
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13.2 STEPS IN CAREER DEVELOPMENT
Fig 13.1: Career Development
1) Self-Assessment
The first step in career development is the self-assessment which
means that the individual has to assess oneself on the kind of career
and growth one wants and what kind of skills and interests are there.
2) Career Awareness
This stage is when an individual explores various career paths which
align with the self-assessment done in the first step. Career
awareness can be how a person can explore various domains and
types of jobs/work available
3) Goal Setting
This is the most important step in career development because this is
where one defines clear short term and long-term goals to meet the
career one aspires. Both short term and long-term goals need to be
defined to begin with short team goals would be more actionable but
long-term goals can be changed or tweaked as per the growth.
4) Skill Training
Once the career and goals are set, one needs to acquire the right
skills to achieve the growth. Skill training can be done through self-
training or joining a structured training program online or offline. Once
the right skills are acquired, one can start the final stage.
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5) Performing
With all the right knowledge and skills, the important part is to perform
the tasks and jobs in the career successfully to grow in the career
path.
The 5 steps are part of an ongoing process. Many times, in a career,
the person would need to revisit the cycle to get the right career
growth.
13.3 REASONS FOR CAREER DEVELOPMENT
i. Making Available Needed Talent

Career development is a natural extension of strategic and
employee training. Identifying staff requirements over the
intermediate and long-term is necessary when a firm sets long-
term goals and objectives. Career development will help
organizations in putting the right people in the right job.
ii. Attracting and Retaining Talents
There is always a scarcity for talented people and there is
competition to secure their services. Talented people always
prefer to work in organizations which care for their future concern
and exhibit greater loyalty and commitment to organizations where
there is career advancement. As career development is an
important aspect of work life as well as personal life, people prefer
to join firms which offer challenges, responsibility and
opportunities for advancement.
iii. Reduced Employee Frustration
Along with educational level and knowledge, the aspirational level
of occupations is also increasing. When these levels are not met
due to economic stagnation frustration sets in. When
organizations downsize to cut costs, employee career paths,
career tracks and career ladders tend to collapse resulting in
aggravation of frustration. Career counselling comes a long way
in reducing frustration.
iv. Enhancing Cultural Diversity
Fast changing scenarios in globalization reflects a varied
combination of workforce representing different types of races,
nationalities, religious faiths, ages and values in the workplaces.
Effective career development programmes provide access to all
levels of employees.
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v. Improving Organizational Goodwill
It is quite natural that if employees think their organizations care
about their long-term well-being through career development, they
are likely to respond in kind by projecting positive images about
their organizations. Career development does help organization in
impressing image and goodwill.
Career development for diversified group of employees assumes greater
significance in view of increase in diversity of employees at workplace.
1. Career Development for Women
Increasing need for utilising the talents of females which would be
around 50% of human resources and increase in educated female
force made organisations to plan for the career development of
women. Women in management are normally in disadvantage
position as they are not part of ‘good-old-boys’ network.’
So, managements have to eliminate the barriers in the process of
career advancement, encourage women for skill development and
facilitate the process of career development of women employees.
2. Glass-Ceiling Audits
Glass-ceiling is defined as, “those artificial barriers based on
attitudinal or organisational bias that prevent qualified individuals
from advancing upward in their organisations into management level
positions.” Glass-ceilings may prevent women employees from
advancing in their organisations. Therefore, managements should
prepare women for managerial positions through counselling,
mentoring and training.
3. Allowing Family Responsibilities
Women employees are tied up with family responsibilities, which
would hamper their career development. Therefore, some firms
introduced certain programmes like alternative career paths,
extended leave, flexitime, flexi-work, job sharing and telecommuting
in order to enable women to balance career and family.
4. Career Development for Minorities
Employees belong to minorities are in a disadvantageous position in
career progression. Therefore, organisations provide certain
programmes for the development of minorities. These programmes
include special training, reservation of certain number of positions for
minorities, internships and organising training courses.
5. Dual Career Couples
Dual career couples follow their own careers; support each other’s
career development. However, career opportunities of any of the
couple may hinder the career of the other. Economic necessity, social
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focus and psychological adjustments encourage dual career
marriages.
Dual career families undergo social maladjustments due to transfers,
uneven career progressions of one of the couples etc. Therefore,
managements should take care for balanced career progression and
development of career couples.
It is very important that all employees must accept their responsibilities for
career development because it is only then that various career
development actions prove effective
The main career development actions include
1) Adequate job performance if career progress is desired.
2) Exposure of skills, knowledge, achievements, performance and so
on to the decision-makers regarding career development
programme.
3) Resignation from the present job if new career opportunities are
found elsewhere.
4) Change of jobs in the same of organisation if better opportunities
are foreseen in that job. This happens when the employee views
organisation loyalty more important than career loyalty.
5) Career guidance is necessary to find better job elsewhere.
13.4. STRATEGIES FOR CAREER DEVELOPMENT
13.4.1. Individual Strategies
Organizations initiate efforts to develop their employees. However, they
cannot take the sole responsibilities to develop each individual’s career.
Individual employees must also take initiatives themselves.
Career results from the matching goals of the individual with that of the
organization.
Career development is a joint responsibility of an employee and the
organization. If an employee wants only the organization to develop his
career, the organization is likely to impose too much organizational control
restricting the autonomy of that employee. Therefore, it advised that you
should be instrumental to manage your own career.
The self-management of your career will help you determine your own
destiny and enhance your independence. In career decisions, the
individual is the only one having appropriate information. He must be
assertive to express his feelings so that he does not get deceived with
regard to his career.
128
i. Achievements
Thinking deeply and writing down your achievements enables you to
rediscover yourself. The easiest way of reflecting your achievements
is to start with your academic achievements at your school or
university. Do not hesitate to include your achievements in co-
curricular activities. Identify what led you to select a course of study.
Think about the strengths you have developed along with specific
knowledge gained.
If you have got a job in an organization, think about the
achievements, in terms of the responsibilities accepted. You must be
deriving pleasure discharging certain responsibilities in your family or
in the society. Recall those positive comments made by teachers,
classmates, family members, friends in the society, colleagues, and
organizational superiors.
ii. Skills and Abilities
While pursuing self-analysis, never underestimate yourself; never
say, ‘I don’t have any skills. You must have many skills and abilities
which are unknown to you. Skill is a vital element of Mckinsey’s 7-S
framework. Skills are the essence of what we contribute to the world.
Skills bring perfection.
Listening, memorizing, negotiating, persuading, inspiring,
investigating, problem- solving, motivating, etc., are only few of the
many skills one may have. A single person cannot have in his
possession all the skills. In addition, a job does not need all the skills.
Moreover, a job may need the required skills in varying degrees.
Remember the skills and abilities you used to complete those
achievements that you have already thought about. Highlight the
skills that you would enjoy using on a regular basis as part of your
ideal job.
iii. Personal Values
Values guide a person to lay importance over things, turns him on
and off, gives happiness in circumstances or otherwise, helps to
decide the extent of integrity he needs in his work or life, exercise
power and responsibility in the workplace, and so on.
Thus, the questions for self-examination are—what are the most
important things to you? What turns you on and off? What are you
committed to? What gives happiness to you? What degree of integrity
do you need in your life and work? How much power and
responsibility do you want in the workplace? Your values further
guide to your extent of devotion to work—do you want to live to work
or work to live, and to strike a balance between them.
129
iv. Interests
There are many things that generate your interests. First, you make
a list of 25 or 30 things you love to do. Thereafter, pick up the
favourites and shortlist the interests. The job you are doing must have
some of these. Give some thoughts to areas which fascinate and
mesmerize you the most, that is, production, quality control, quality
system, maintenance, purchase or planning, administrative,
computational, scientific, indoor or outdoor work, etc.
v. disabilities (If known)
Man, disabilities cannot stop you from achieving that you most aspire
for. Man has strong will always supports you to reach your goal. Be
honest with your known disabilities or physical impairments that may
impact upon what you want to do. You may have allergies, colour
blindness, back problems, asthma, etc. The presence of anyone or
two disabilities does not mean you cannot do a particular job. You
need to be aware of how you would manage any roadblocks
restricting you to achieve. Your strong will let you to success.
vi. Personal and Family Circumstances
Now know your achievements, skills and abilities, personal values,

interests, etc. Prepare yourself to face the impacts of these on your
employment in terms of hours, financial commitments, limitations,
etc. his will definitely be able to overcome the roadblocks.
3.4.2. Organizational Strategies
Being aware of the utmost need of employee career development,
organizations are designing pro-grammes for effective management of
human resources. The aim of this effort is directly related to career issues
such as reducing employee attrition, exploring potential and providing
matching assignments, developing high-potential candidates, preparing
for managerial positions, enhancing problem-solving abilities, reducing
problems arising out of lack of knowledge and skills, providing ample
opportunities for growth, ensuring upward movement for potential
employees, and so forth.
Many organizations have instituted a system of career counselling
through workshops and have employed career guidance specialists.
Literatures suggest a number of specific drives that organizations can take
to make the career programmes effective.
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13.5 FIVE STAGES IN CAREER DEVELOPMENT
Fig.13.2: Career Development
13.5.1. Exploration
The exploratory stage is the period of transition from college to work, that
is, the period immediately prior to employment. It is usually the period of
one’s early 20 s and ends by mid-20 s. It is a stage of self-exploration and
making preliminary choices.
13.5.2 Establishment
This career stage begins when one starts seeking for work. It includes
getting one’s first job. Hence, during this stage, one is likely to commit
mistakes; one has also the opportunities to learn from such mistakes and
may also assume greater responsibilities. Employee accepts job
challenges and develops competence in a speculating area. Employee
develops creativity and rotates into a new area after three-five years.
13.5.3 Mid-Career
During this stage, the performance may increase or decrease or may
remain constant. While some employees may reach their goals at the
early stage and may achieve greater heights, some may be able just to
maintain their performance. While the former may be called ‘climbers’, the
later ones are not very ambitious though competent otherwise. During this
stage, an employee tries to update himself/herself technically and
develops skills in coach-ing others. Employee may rotate into a new job
requiring new skills.
13.5.4. Late Career
This stage is usually a pleasant one because during this stage, the
employee neither tries to learn new things nor tries to improve employee
131
performance over that of previous years. He/she takes advantage of and
depends on his/her reputation and enjoys playing the role of an elderly
statesperson. Employee may shift from a power role to one of
consultation. Employee starts identifying and developing successors and
may also start activities outside the organisation.
13.5.5. Decline
Since it is the final stage of one’s career, it ends in the retirement of the
employee after putting up decades of service full of continuous
achievements and success stories. As such, it is viewed as a hard stage.
LET US SUM UP
Current information about the organization and future trends helps
employees create more realistic career development goals. Focus on skill
development contributes to learning opportunities. Opportunities for
promotion and/or lateral moves contribute to the employee's career
satisfaction. A greater sense of responsibility for managing one's own
career contributes to self-confidence. Career planning and development
clarifies the match between organizational and individual employee goals.
It's cost-effective to use your own staff talent to provide career
development opportunities within your department. Career development
increases employee motivation and productivity. Attention to career
development helps you attract top staff and retain valued employees.
Supporting career development and growth of employees is mandated by
the Philosophy of Human Resources Management In this unit, you have
learnt about the Career development and its importance
CHECK YOUR PROGRESS
1. Career management activities can be judges by their success at
a) Retirement
b) Selection
c) Any point in time
d) Mid-career only
2. Choose which of the following is a benefit to the individual while
receiving training?
a) Creates an appropriate climate for growth, communication
b) Aids in increasing productivity and/ or quality of work
c) Satisfies a personal needs of the trainer
132
3._________ seeks to examine the goals of the organisation and the
trends that are likely to affect these goals.
a) Organisational Support
b) Organisational analysis
c) Person analysis
d) Key skill abilities analysis
4. Which of these is the benefit of needs assessment?
a) Assessment makes training department more accountable
b) Higher training costs
c) Loss of business
d) Increased overtime working
5. Which of the following is a technique of evaluation?
a) Longitudinal or time - series analysis
b) Transfer validity
c) Inter - organizational validity
GLOSSARY
Training : refers to the acquisition of knowledge, skills,

and competencies as a result of the
teaching
Career : refers to those personal improvements which

development one undertakes to achieve a personal career
plan
SUGGESTED READINGS
Management”, latest Edition, Everest Publishing House, New Delhi
2. Aswathappa,K (2011) “Human Resource Management, Text and
3. IndranilMutsuddi, (2011), “Essentials of Human Resource
Management”, latest Edition, Newage Publishing House, New Delhi.
4. Kahok, M.A. (2012),Illustrated Case Studies in Indian Management,
133
WEB RESOURCES
1. Lecture 42 : Career Development Strategy - I - YouTube
2. Lecture 41 : Career Planning & Development - YouTube
3. Lecture 42 : Career Development and Training - YouTube
4. Lecture 45 : Career Planning & Development (Contd.) - YouTube
1. c) 2. c) 3. b) 4. a) 5. a)
134
BLOCK 4
PERFORMANCE APPRAISAL
Unit 14. Performance Appraisal

Unit 15. Compensation
Unit 16. Job Evaluation
Unit 17. Incentives, Bonus and Fringe Benefits
135
UNIT 14
PERFORMANCE APPRAISAL
STRUCTURE
Overview
Learning Objectives
14.1 Performance Appraisal concept
14.1.1 Need and Importance
14.1.2 Objectives
14.1.3 Methods and Modern Techniques of Performance
appraisal
14.1.4 Requisite of good appraisal plan
14.1.5 Problems in Performance Appraisal
14.2 Advantages of Performance Appraisal
14.3 Disadvantages of performance appraisal
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
It is the systematic assessment of an individual with respect to his or her
performance on the job and his or her potential for development in that
job. Thus, performance appraisal is a systematic and objective way of
evaluating the relative worth or ability of an employee in performing his
job. The two aspects of performance appraisal considered to be important
are systematic and objective. The appraisal is said to be systematic when
it evaluates all performances in the same manner, by applying the same
approach, so that appraisal of different persons is comparable. In this unit,
you will learn about various methods of performance appraisal system.
Such an appraisal is taken from time to time according
to plan; it is not left to probability. Thus, both raters’ and ratees know the
system of perfor-mance appraisal and its timing. Appraisal has objectivity
also. Its important aspect is that it attempts at precise measurement by
trying to remove human biases and prejudices.
LEARNING OBJECTIVES
• explain the concept performance appraisal
• discuss the requisite of good appraisal
136
• discuss the problems involved in appraisal
14.1 PERFORMANCE APPRAISAL - MEANING
Performance appraisal system has been defined in many ways. The
easiest way to understand the meaning of performance appraisal is as
follows:
The term performance appraisal refers to the regular review of an
employee's job performance and overall contribution to a company. Also
known as an annual review, performance review or evaluation, or
employee appraisal, a performance appraisal evaluates an employee’s
skills, achievements, and growth, or lack thereof.
Performance appraisals are usually designed by human resources (HR)
departments as a way for employees to develop in their careers. They
provide individuals with feedback on their job performance. It ensures that
employees are managing and meeting the goals expected of them, giving
them guidance on how to reach them if they fall short.
Because companies have a limited pool of funds from which to award

incentives, such as raises and bonuses, performance appraisals help
determine how to allocate those funds. They provide a way for companies
to determine which employees have contributed the most to the
company’s growth so companies can reward their top-performing
employees accordingly.
Performance appraisals also help employees, and their managers create
a plan for employee development through additional training and
increased responsibilities, as well as to identify ways the employee can
improve and move forward in their career.
Performance Appraisal is the systematic evaluation of the performance of
employees and to understand the abilities of a person for further growth
and development.
An employee performance appraisal system has defined a process in
which a predefined standard of factors such as work knowledge, work
performance, work attitude, leadership quality, team player behaviour,
consistency, decision-making abilities, and skills is created and then
actual performance, as well as the personality of employee, is compared
with these expected standards by the organization.
A performance appraisal used in the organization is a regular review of
employees’ performance to verify their contribution to the company. It is
also known as an annual review or performance evaluation. It evaluates
the skills, growth, achievement, or failure of the employees. The
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performance appraisal is often used to justify the decisions related to
promotions, pay hikes, bonuses, and termination of the employee.
A corporate president put a senior executive in charge of a failing
operation. His only directive was “Get it in the black.” Within two years of
that injunction, the new executive moved the operation from a deficit
position to one that showed a profit of several million. Fresh from his
triumph, the executive announced himself as a candidate for a higher-
level position and indicated that he was already receiving offers from other
companies.
The corporate president, however, did not share the executive’s positive
opinions of his behaviour. In fact, the president was not at all pleased with
the way the executive had handled things.
Naturally the executive was dismayed, and when he asked what he had
done wrong, the corporate president told him that he had indeed
accomplished what he had been asked to do, but he had done it single-
handedly, by the sheer force of his own personality. Furthermore, the
executive was told, he had replaced people whom the company thought
to be good employees with those it regarded as compliant. In effect, by
demonstrating his own strength, he had made the organization weaker.
Until the executive changed his authoritarian manner, his boss said, it was
unlikely that he would be promoted further.
Implicit in this vignette is the major fault in performance appraisal and

management by objectives namely, a fundamental misconception of what
is to be appraised.
Performance appraisal has three basic functions:
a. to provide adequate feedback to each person on his or her
performance.
b. to serve as a basis for modifying or changing behaviour toward
more effective working habits; and
c. to provide data to managers with which they may judge future job
assignments and compensation.
The performance appraisal concept is central to effective management.
Much hard and imaginative work has gone into developing and refining it.
In fact, there is a great deal of evidence to indicate how useful and
effective performance appraisal is. Yet present systems of performance
appraisal do not serve any of these functions well.
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As it is customarily defined and used, performance appraisal focuses not
on behaviour but on outcomes of behaviour. But even though the
executive in the example achieved his objective, he was evaluated on how
he attained it. Thus, while the system purports to appraise results, in
practice, people are really appraised on how they do things—which is not
formally described in the setting of objectives, and for which there are
rarely data on record.
In human experience, the crucial aspect of any manager’s job and the
source of most failures, which is practically never described, is the “how.”
As long as managers appraise the ends yet actually give greater weight
to the means, employ a static job description base which does not
describe the “how,” and do not have support mechanisms for the appraisal
process, widespread dissatisfaction with performance appraisal is bound
to continue. In fact, one personnel authority speaks of performance
appraisal as “the Achilles heel of our profession”
Just how these inadequacies affect performance appraisal systems and
how they can be corrected to provide managers with realistic bases for
making judgments about employees’
No matter how well defined the dimensions for appraising performance on

quantitative goals are, judgments on performance are usually subjective
and impressionistic. Because appraisals provide inadequate information
about the subtleties of performance, managers using them to compare
employees for the purposes of determining salary increases often make
arbitrary judgments.
Ratings by different managers, and especially those in different units, are
usually incomparable. What is excellent work in one unit may be
unacceptable in another in the same company.
When salary increases are allocated on the basis of a curve of normal
distribution, which is in turn based on rating of results rather than on
behaviour, competent employees may not only be denied increases, but
may also become demotivated. Trying to base promotion and layoff
decisions on appraisal data leaves the decisions open to acrimonious
debate. When employees who have been retired early have complained
to federal authorities of age discrimination, defendant companies have
discovered that there were inadequate data to support the layoff
decisions.
Although managers are urged to give feedback freely and often, there are
no built-in mechanisms for ensuring that they do so. Delay in feedback
creates both frustrations, when good performance is not quickly
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recognized, and anger, when judgment is rendered for inadequacies long
past.
There are few effective established mechanisms to cope with either the
sense of inadequacy managers has about appraising subordinates, or the
paralysis and procrastination that result from guilt about playing God.
Some people might argue that these problems are deficiencies of
managers, not of the system. But even if that were altogether true,
managers are part of that system. Performance appraisal needs to be
viewed not as a technique but as a process involving both people and
data, and as such the whole process is inadequate.
Recognizing that there are many deficiencies in performance appraisals,
managers in many companies do not want to do them. In other companies
there is a great reluctance to do them straightforwardly. Personnel
specialists attribute these problems to the reluctance of managers to
adopt new ways and to the fear of irreparably damaging their
subordinates’ self-esteem.
One of the main sources of trouble with performance appraisal systems
is, as I have already pointed out, that the outcome of behaviour rather
than the behaviour itself is what is evaluated. In fact, most people’s jobs
are described in terms that are only quantitatively measurable; the job
description itself is the root of the problem.
Objectives of Performance Appraisal

Performance Appraisal can be done with following objectives in mind:
1. To maintain records in order to determine compensation packages,
wage structure, salaries raise, etc.
2. To identify the strengths and weaknesses of employees to place
right men on right job.
3. To maintain and assess the potential in a person for growth and
development.
4. To provide feedback to employees regarding their performance and
related status.
5. It serves as a basis for influencing working habits of the employees.
6. To review and retain the promotional and other training
programmes.
According to Flippo, a prominent personality in the field of Human
resources, “performance appraisal is the systematic, periodic and an
impartial rating of an employee’s excellence in the matters pertaining to
his present job and his potential for a better job.”
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14.1.1 Need and Importance
Performance is always measured in terms of outcome and not efforts.
Performance Appraisal is needed in most of the organizations in order:
1) To give information about the performance of employees on the job
and give ranks on the basis of which decisions regarding salary
fixation, demotion, promotion, transfer and confirmation are taken.
2) To provide information about amount of achievement and behavior
of subordinate in their job. This kind of information helps to evaluate
the performance of the subordinate, by correcting loopholes in
performances and to set new standards of work, if required.
3) To provide information about an employee’s job-relevant strengths
and & weaknesses.
4) To provide information so as to identify shortage in employee
regarding ability, awareness and find out training and developmental
needs.
5) To avoid grievances and in disciplinary activities in the organization.
6) It is an ongoing process in every large-scale organization.
Performance appraisals in an organization provide employees and
managers with an opportunity to converse in the areas in which
employees do extremely well and those in which employees need
improvement.
Performance appraisals should be conducted on a frequent basis, and

they need not be directly attached to promotion opportunities only.
It is important because of several reason s such as:
1) Personal Attention: Performance appraisal evaluation, gives
employee to draw personal concern from supervisor and talk about
their own strengths and weaknesses.
2) Feedback: Employees on a regular basis get feedback of their
performances and issues in which they lack, which needs to be
resolved on a regular basis.
3) Career Path: It allows employees and supervisors to converse goals
that must be met to grow within the company. This may encompass
recognizing skills that must be acquired, areas in which improvement
is required, and additional qualification that must be acquired.
4) Employee Accountability: Employees are acquainted that their
evaluation will take place on a regular basis and therefore they are
accountable for their job performance.
5) Communicate Divisional and Company Goals: It not only
communicates employees’ individual goals but provides an
opportunity for managers to explain organizational goals and in the
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manner in which employees can contribute in the achievement of
those goals.
14.1.2 Objectives of Performance Appraisal
Performance appraisal in any organization is undertaken to meet certain
objectives which may be in the form of salary increase, promotion,
recognizing training and development needs, providing feedback to
employees and putting stress on employees for better performance.
An employee in an organization may think that performance appraisal is
basically used by the organization to blame employees and to take
corrective actions. An employee may feel that performance appraisal is
introduced in an organization for punishment in such a case well thought
out performance appraisal may result into failure.
• Salary Increase: Performance appraisal plays an important role in
making decision about increase in salary. Increase in salary of an
employee depends on how he is performing his job. Evaluation of an
employee takes place on a continuous basis which may be formally
or informally. In a large as well as in small organizations
performance appraisal takes place but it may be in a formal or
informal way. It shows how well an employee is performing and to
what extent a hike in salary would take place in comparison to his
performance.
• Promotion: Performance appraisal gives an idea about how an em
ployee is work-ing in his present job and what his strong and weak
points are. In comparison to his strength and weaknesses it is
decided whether he can be promoted to the next higher position or
not. If necessary, what additional training is required. Similarly, it
could be used for demotion, discharge of an employee and transfer.
• Training and Development: Performance appraisal gives an idea
about strengths and weaknesses of an employee on his present job.
It gives an idea about the training required by an employee for
overcoming the limitations that an employee is having for better
performance in future.
• Feedback: Performance appraisal gives an idea to each employee
where they are, how they are working, and how are they contributing
towards achievement of organizational objectives. Feed works in
two ways. First, the person gets view about his performance, and he
may try to conquer his weaknesses which may lead to better
performance. Second, the person gets satisfied after he relates his
work with organizational objectives. It gives him an idea that he is
doing a meaning full work and can also contribute in a better way.
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• Pressure on Employees: Performance appraisal puts a sort of
stress on employees for better performance. If the employees are
aware that they are been appraised in comparison to their
performance and they will have positive and acceptable behaviour
in this respect.
14.1.3 Methods and Modern Techniques of Performance Appraisal
Performance appraisal methods are categorized in two ways traditional
and modern methods. Each organization adopts a different method of
performance appraisal according to the need of organization. In small
organization, it may be on an informal basis where personal opinion of a
superior about his subordi-nates may consider for appraisal.
Traditional Methods Modern Methods
6) Management by Objectives
1) Ranking method (MBO)
7) Behaviourally anchored rating

2) Paired comparison scales
8) Assessment centres
3) Grading method
9) 360-degree appraisal
4) Forced distribution method
10) Cost accounting method
5) Forced choice method
1. Ranking Method: It is the oldest and simplest method of performance

appraisal in which employees are ranked on certain criteria such as
trait or characteristic. The employee is ranked from highest to lowest
or from worst to best in an organization. Thus, if there are seven
employees to be ranked then there will be seven ranks from 1 to 7.
Rating scales offer the advantages of flexibility comparatively easy
use and low cost. Nearly every type of job can be evaluated with the
rating scale, the only condition being that the Job-performance criteria
should he changed’ .
In such a way, a large number of employees can be evaluated in a
shorter time period. Thus, the greatest limitation of this method is that
differences in ranks do not indicate how much an employee of rank 1
is better than the employee whose rank is last.
2. Paired Comparison: In method is comparatively simpler as
compared to ranking method. In this method, the evaluator ranks
employees by comparing one employee with all other employees in
the group.
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The rate is given slips where, each slip has a pair of names, the rate
puts a tick mark next those employees whom he considers to be the
better of the two. This employee is compared number of times so as
to determine the final ranking.
This method provides compari-son of persons in a better way. Howe
ver, this increases the work as thelarge number of com-parisons has
to be made.
For example, to rank 50 persons through paired comparison, there will
be 1,225 comparisons. Paired comparison method could be employed
easily where the numbers of employees to be compared are less.
3. Grading Method: In this method, certain categories are defined well
in advance and employees are put in particular category depending
on their traits and characteristics. Such categories may be defined as
outstanding, good, average, poor, very poor, or may be in terms of
alphabet like A, B, C, D, etc. where A may indicate the best and D
indicating the worst. This type of grading method is applied during
Semester pattern of examinations. One of the major limitations of this
method is that the ratter may rate many employees on the better side
of their performance.
4. Forced Distribution Method: This method was evolved to abolish the
trend of rating most of the employees at a higher end of the scale. The
fundamental assumption in this method is that employees’
performance level conforms to a normal statistical distribution. For
example, 10 per cent employees may be rated as excellent, 40 per
cent as above average, 20 per cent as average, 10 per cent below
average, and 20 per cent as poor. It eliminates or minimizes the
favouritism of rating many employees on a higher side. It is simple and
easy method to appraise employees. It becomes difficult when the rate
has to explain why an employee is placed in a particular grouping as
compared to others.
5. Forced-choice Method: The forced-choice rating method contains a
sequence of question in a statement form with which the rate checks
how effectively the statement describes each individual
evaluted in the organization.
There may be some variations in the Methods and statements used,
but the most common method of forced choice contains two
statements both of which may be positive and negative. It may be both
the statement describes the characteristics of an employee, but the
ratter is forced to tick only one i.e the most appropriate statement
which may be more descriptive of the employee.
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6. Check-list Method: The main reason for using this method is to
reduce the burden of evaluator. In this method of evaluation, the
evaluator is provided with the appraisal report which consist of series
of questions which is related to the appraise. Such questions are
prepared in a manner that reflects the behaviour of the concerned
appraise. Every question has two alternatives, yes or no, as given
below:
a) Is he/she respected by his/her subordinates? Yes/No
b) Is he/she ready to help other employees? Yes/No
7. Critical Incidents Method: This method is very useful for finding out
those employees who have the highest potential to work in a critical
situation. Such an incidence is very important for organization as they
get a sense, how a supervisor has handled a situation in the case of
sudden trouble in an organization, which gives an idea about his
leadership qualities and han-dling of situation. It is also said to be a c
ontinuous appraisal method where employees are appraised
continuously by keeping in mind the critical situation. In this method,
only the case of sudden trouble and behaviour associated with these
incidents or trouble are taken for evaluation.
8. Graphic Scale Method: It is one of the simplest and most popular
techniques for appraising performances of employee. It is also known
as linear rating scale. In graphic rating scale the printed appraisal form
is used to appraise each employee.
Such forms contain a number of objectives, and trait qualities and
characters to be rated like quality of work and amount of work, job
knowhow dependability, initiative, attitude, leadership quality and
emotional stability.
9. Essay Method: In this method, the ratter writes a detailed description
on an employee’s characteristics and behaviour, Knowledge about
organizational policies, procedures and rules, Knowledge about the
job, Training and development needs of the employee, strengths,
weakness, past performance, potential and suggestions for
improvement. It is said to be the encouraging and simple method to
use. It does not need difficult formats and specific training to complete
it.
10. Field Review Method: In this method of appraisal direct superior is
not going to appraise an employee but appraised by another person,
usually, from personnel department. The ratter, in such a case,
appraises the employee on the basis of his past records of productivity
and other information such as absenteeism, late coming, etc.,
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It is more suitable in a situation where an organization wants to provide
promotion to an employee. It also gives information for comparing
employees from different locations and units. It reduces partiality to some
extent as personnel department person is supposed to be trained in
appraisal mechanism.
Modern Methods
1. Management by Objectives (MB0): The concept of ‘Management by
Objectives’ (MBO) was coined by Peter Drucker in 1954. It is a
process where the employees and the superiors come together to
identify some goals which are common to them, the employees set
their own goals to be achieved, the benchmark is taken as the criteria
for measuring their performances and their involvement is there in
deciding the course of action to be followed.
The basic nature of MBO is participative, setting their goals, selecting
a course of actions to achieve goals and then taking decision. The
most important aspect of MBO is measuring the actual performances
of the employee with the standards set by them. It is also said to be a
process that integrates organizational objectives into individual
objectives.
2. Behaviourally Anchored Rating Scales: This method is a
combination of traditional rating scales and critical incidents methods.
It consists of present critical areas of job performance or sets of
behavioural statements which describes the important job
performance qualities as good or bad (for e.g. the qualities like inter
personal relationships, flexibility and consistency, job knowledge etc).
These statements are developed from critical incidents.
3. Assessment Centres: It is a method which was first implemented in
German Army in 1930. With the passage of time industrial houses and
business started using this method. This is a system of assessment
where individual employee is assessed by many experts by using
different technique of performance appraisal. The techniques which
may be used are role playing, case studies, simulation exercises,
transactional analysis etc.
4. 360 Degree Performance Appraisals: This method is also known as
‘multi-ratter feedback’, it is the appraisal in a wider perspective where
the comment about the employees’ performance comes from all the
possible sources that are directly or indirectly related with the
employee on his job. In 360-degree performance appraisal an
employee can be appraised by his peers, managers (i.e. superior),
subordinates, team members, customers, suppliers/ vendors - anyone
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who comes into direct or indirect contact with the employee and can
provide necessary information or feedback regarding performance of
the employee the “on-the-job”.
The four major component of 360-degree performance appraisal are
a) Employees Self Appraisal
b) Appraisal by Superior
c) Appraisal by Subordinate
d) Peer Appraisal.
5. Cost Accounting Method: In this method performance of an employee
is evaluated on the basis of monetary returns the employee gives to
his or her organization. A relationship is recognized between the cost
included in keeping the employee in an organization and the benefit
the organization gets from him or her. The evaluation is based on the
established relationship between the cost and the benefit.
14.1.4 Requisite of Good Appraisal Plan
The performance appraisal system is always questioned in terms of its

effectiveness and the problems of reliability and validity. It is always
difficult to know whether what is appraised is what was supposed to be
appraised. As long as subjective judgment is there this question cannot
be answered perhaps, the following steps can help improve the system.
a) The supervisors should be told that they themselves will be
evaluated on the basis of how seriously they are performing their
duties.
b) To perform assigned task of evaluation in a better way superior
should be provided with better training of writing report.
c) To carry out job evaluation studies and prepares job
descriptions/roles and prepares separate forms for various positions
in the organization.
d) The system should be designed in such a way that it is neither
difficult to understand nor impossible to practice.
e) The supervisor should monitor whether the improvement in
performance in the areas found weak is taking place or not and, if
not, help the employee to achieve the required improvement.
f) Finally, reviewing, the appraisal systems every now and then help
updating it, and making appropriate changes in it. This is the most
important factor in making performance appraisal effective, with the
passage of time necessary changes in tasks, abilities and skills to
perform has to be made. If changes in the format are not considered
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the reports may not generate the kind of result needed to satisfy
appraisal objectives.
The following measures could also be adopted for improving the
effectiveness of an appraisal:
a) Behaviourally Based Measures: The research strongly favours
behaviourally based measures over those developed around
traits.
b) Ongoing Feedback: Employees like to know how they are
performing the duties assigned to them.
c) Multiple Ratters: If a person is evaluated by a large no of superior
then chance of getting more frequent information increases
d) Peer Evaluations: Peer evaluations are conducted by employees’
co-workers, people explicitly familiar with the jobs involved mainly
because they too are doing the same thing, they are the person
who know the co-workers’ day to-day work behaviour and should
get a chance to provide the management with some feedback.
Fig. 14.1 Components of Performance Appraisal

14.1.5 Problems in Performance Appraisal
Performance appraisal technique is very beneficial for an organization for
taking decisions regarding salary fixation, demotion, promotion, transfer
and confirmation etc.
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Butit is not freed from problem in spite of recognition that a completely
error-free performance appraisal can only be idealized a number of errors
that extensively hinder objective evaluation.
Some of these problems are as follows:
Biasness in rating employee: It is the problem with subjective measure
i.e., the rating which will not be verified by others. Biasness of ratter may
include:
a. Halo Effect: It is the propensity of the ratters to rate on the basis
of one trait or behavioural consideration in rating all other traits or
behavioural considerations. One way of minimizing the halo
effect is appraising all the employees by one trait before going to
rate on the basis of another trait.
b. The Central Tendency Error: It is the error when rater tries to
rate each and every person on the middle point of the rating scale
and tries not to rate the people on both ends of the scale that is
rating too high or too low. They want to be on the safer side as
they are answerable to the management.
c. The Leniency and Strictness Biases: The leniency biasness
exists when some ratters have a tendency to be generous in their
rating by assigning higher rates constantly. Such ratings do not
serve any purpose.
d. Personal prejudice: If the ratters do not like any employee or
any group, in such circumstances he may rate him on the lower
side of the scale, the very purpose of rating is distorted which
might affect the career of employees also.
e. The Recent Effect: The ratters usually retain information about
the recent actions of the employee at the time of rating and rate
on the basis of recent action taken place which may be favourable
or unfavourable at that point of time.
1. The superiors may be unsuccessful in conducting performance
appraisal of employees and post-performance appraisal interviews
2. The performance appraisal is mostly based on subjective assessment.
3. The performance appraisal techniques have a low reliability and
validity in terms of result.
4. Ratings an employee on the negative side may disturb interpersonal
relations and industrial relations system.
5. Appraisers’ opinion on the performance of the employee may lead to
setback on production. \
6. An organization may give emphasis to punishment if an employee has
not done a good job rather than providing training.
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7. Few ratings are based on guess work.
Various other problems of performance appraisal are:
• There was a significant relationship between rating by superior
and performance after promotions.
• Appraisal reports were completed within a short period of time.
• The circumstances were very unpleasant in feedback interview.
• The Subordinates were not given suggestion in a manner which
may be helpful to them.
14.2. ADVANTAGES OF PERFORMANCE APPRAISAL
It is said that performance appraisal is an investment for the company
which can be justified by following advantages:
1) Promotion: Performance Appraisal helps the supervisors to chalk
out the promotion programmes for efficient employees. In this
regard, inefficient workers can be dismissed or demoted in case.
2) Compensation: Performance Appraisal helps in chalking out
compensation packages for employees. Merit rating is possible
through performance appraisal. Performance Appraisal tries to give
worth to a performance. Compensation packages which include
bonuses, high salary rates, extra benefits, allowances and pre-
requisites are dependent on performance appraisal. The criteria
should be merit rather than seniority.
3) Employees Development: The systematic procedure of
performance appraisal helps the supervisors to frame training
policies and programmes. It helps to analyse strengths and
weaknesses of employees so that new jobs can be designed for
efficient employees. It also helps in framing future development
programmes.
4) Selection Validation: Performance Appraisal helps the
supervisors to understand the validity and importance of the
selection procedure. The supervisors come to know the validity and
thereby the strengths and weaknesses of the selection procedure.
Future changes in selection methods can be made in this regard.
5) Communication: For an organization, effective communication
between employees and employers is very important. Through
performance appraisal, communication can be sought for in the
following ways:
a. Through performance appraisal, the employers can

understand and accept the skills of subordinates.
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b. The subordinates can also understand and create trust and
confidence in superiors.
c. It also helps in maintaining cordial and congenial labour
management relationship.
d. It develops the spirit of work and boosts the morale of
employees.
All the above factors ensure effective communication.

Motivation: Performance appraisal serves as a motivation tool. Through
evaluating the performance of employees, a person’s efficiency can be
determined if the targets are achieved. This very well motivates a person
for a better job and helps him to improve his performance in the future.
14.3. DISADVANTAGES OF PERFORMANCE APPRAISAL

1) If the attributes being used in this method are not correctly defined
the data collected won’t be useful.
2) Sometimes biases can be an issue in this system.
3) Some objective factors can be vague and difficult to pin down.
There are no known scientific methods to measure that.
4) Managers sometimes are not qualified enough to assess the
abilities of the employees, thus detrimental to the growth of an
employee.
LET US SUM UP
In this unit, you have learnt about various methods of performance
appraisal system. The basic purpose of performance appraisal is to
identify employees worth and contribution to the company. Important
factors include – attendance, efficiency, attitude, quality of work, amount
of work are just a few important factors.
The physical or objective factors like attendance, amount of work,

efficiency can be easily measured by the records maintained by
the Human Resource Department Manager.
However, it gets a bit icky, when it comes to measuring subjective factors

like attitude, behaviour, friendliness etc. But to properly evaluate an
individual’s performance, appraisal of both subjective and objective
factors needs to be done.
As Dale Yoder said, “Performance appraisal includes all formal
procedures used to evaluate personalities and contributions and potential
of group members in a working organisation. It is a continuous process to
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secure information necessary for making correct and objective decisions
on employees.
CHECK YOUR PROGRESS
1. ______ is an objective assessment of an individual's performance
against well-defined benchmarks.
a) Performance Appraisal
b) HR Planning
c) Information for goal identification
2. What is linked with performance appraisal?
a) Job Design
b) Development
c) Job analysis
3. Which of the following is an alternate term used for performance
appraisal?
a) Quality and quantity of output
b) Job knowledge
c) Employee assessment
4. How can performance appraisal contribute to a firm's competitive
advantage?
a) Ensures legal compliances
b) Minimising job dissatisfaction and turnover
c) Improves performance
d) All of the above
5. Successful defenders use performance appraisal for identifying
a) Staffing needs
b) Job behaviour
c) Training needs
GLOSSARY
Compensation : Typically, compensation refers to monetary
payment given to an individual in exchange for
their services
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: Promotions refer to the entire set of activities,
Promotion
which communicate the product, brand or
service to the user
SUGGESTED READINGS
1. Anjali Ghanekar, (2010), Essentials of Human Resource
Management, latest Edition, Everest Publishing House, New Delhi
2. Aswathappa,K (2013) Human Resource Management, Text and
Cases, McGraw Hill Education; Seventh edition, India.
WEB RESOURCES
1. Performance Management & Appraisal - Bing video
2. Lecture - 22 Performance Appraisal 1 - YouTube
3.Lec-7 Performance Evaluation and Appraisal-I - YouTube
4. Methods of Performance Appraisal in simple explanation - Bing video

1.a) 2.c) 3.c) 4.d) 5.c)
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UNIT 15
COMPENSATION
STRUCTURE
Overview
Learning Objectives
15.1 Compensation
15.2 Nature of compensation management
15.3 Compensation objectives
15.4 Major elements of components management
15.5 Importance of compensation management
15.6 Compensation Plan
15.6. 1. Compensation Rewards
15.6.2. Non-Compensation Rewards
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
In this unit, you will study compensation management which is the practice
of planning and distributing the overall pay and benefits package to a
company’s employees. This program ensures that a company’s salaries
and bonuses remain competitive within the industry and equitable within
the organization. It also involves managing company benefit programs
and ensuring job classifications are up to date, risks are minimized, and
the package meets the overall needs of employees and their families.
LEARNING OBJECTIVES
• explain the concept of compensation management

• discuss the nature and objectives of compensation
• describe the elements and importance of compensation
management
• assess compensation plan.
15.1 COMPENSATION
Employees’ compensation is one of the major determinants of employee

satisfaction in an organization. The compensation policy and the reward
system of an organization are viewed by the employee as a indicator of
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the management’s attitude and concern for them. It is not just the
compensation in tote, but its fairness as perceived by the employees that
determines the success of a wage and salary administration system.
Hence, it very important for the management to design and implement its
compensation system with utmost care and tact. A good wage and salary
administration should be able to attract and retain employees, give them
fair deal, keep the organization competitive and motivate employees to
perform their best.
Compensation and Benefits in HRM refer to the salary, monetary, and as
well as non-monetary privileges provided to the employees at the
workplace by the organization. It is a primary tool of the Human Resource
Managers to bring out the best potential of the employees in their work. It
works in a way – ‘Better is the compensation & benefits, better is the
performances and retention!’ From internal motivation to the higher level
of productivity, Compensation and Benefits does it all.
Companies with better Compensation and Benefits plans are on the verge
of stealing your employees because workers always look to switch to the
organization’s having better salary structures, compensation, and other
benefits like health insurance. Everything related to the company’s work
culture and benefit plans can be easily found online, especially Glassdoor.
Each experience faced by employees from monetary to non-monetary
terms is present in online reviews about the company.
Also, such information helps employees weigh the pros and cons of
working with the company, which leads to their decision-making about
joining the company by evaluating the online data. Henceforth, the new
talent can either get attracted or distracted by seeing those reviews online.
The more you keep your internal employees happy with the reasonable
Compensation and Benefits programs, the better word of mouth they will
spread for your company.
In general Human Resource terms, compensation is the benefit the
employee receives in rewards for exchanging the service he has provided
to the organization.
According to Dale Yoder, – ‘Compensation and benefits simply mean
paying people for completing the task allocated to them.’
According to Cascio, – ‘The term compensation signifies paying the direct
cash amounts or an indirect amount via providing benefits to employees
to strive for higher productivity in the organization.’
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Compensation plays a significant role in Human Resource Management
to boost the overall performance and effectiveness of the employees
working in the organization. Compensation is at the heart center of every
company! Like heartbeat is one of the primary components for human
survival, benefits availed via settlement keep employees survive or retain
for the long term in the companies. It usually motivates employees in
various unseen ways, reinforcing them to provide more than 100% effort
to earn more and more such rewards. Providing compensation to the
breadwinners in the organizations has been in practice for years now in
the industries today.
Earlier, compensation management was limited to designing, maintaining
and sustaining a pay structure, but in the present era, the term
compensation management is composed of several activities about job
evaluation, market rate analysis, job analysis, pay structure design and
maintenance, etc. compensation management refers to the efforts of the
organisation, to maintain a competitive compensation structure, keeping
in mind the conditions of the local labour market, concerning present and
future financial resources of an organisation.
"Compensation management refers to payment systems which determine

employee In a nutshell, wages or salary, direct and indirect rewards"
15.2. NATURE OF COMPENSATION MANAGEMENT
i. Integral part of HRM: Compensation management is essential for

the entire human resource of the organisation. Thus, it has become
an integral part of human resource management as it plays a
significant role in the proper functioning of HRM.
ii. Challenging Function: Compensation management has a great
impact on the objectives established by the organisation. Therefore,
it is considered to be one of the most challenging functions of human
resource management.
iii. Dynamic Discipline: Compensation management is known as a
dynamic discipline because it is not only affected by individual
factors, but business and environmental factors also influence it to a
large extent.
iv. Wide Application: Compensation management is not only related
to paying the employees but also focuses on motivating them. It also
supervises the functions of recruitment, budgeting, monetary
forecasting, improving human relationships, computer operations,
tax-related laws, etc.
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v. Strategic Tool: Compensation management serves as a strategic
tool, which increases the competitive level of an organisation and
prepares it for the stiff competition taking place in today's global
industries.
15.3. COMPENSATION OBJECTIVES
i. To Attract and Retain Employees: The basic purpose of
compensation management is to attract and retain talented
employees. To attract the workforce from the competitor's
organisations, sometimes premium wages are required to be
offered. Finally, a payment system should be as per the demand and
supply of labour in the market.
ii. To Motivate Employees: Compensation management motivates
employees to work hard to improve their productivity as well as that
of the organisation.
iii. To Optimise Cost: Compensation management should establish a
suitable relationship between performance and compensation
because it is not necessary that, if employees are given high wages
they will perform better without any valid linkage.
iv. To Achieve Consistency: Compensation management aims at
maintaining both internal and external equity in compensating
employees. Internal equity can be achieved by making payments
based on the job specification and employees' performance on the
job whereas external uniformity can be achieved by making
payments for a job similar to all organisations. Compensation
management also tries to reduce the disparity in compensation of a
specific work as related to other organisations.
15.4. MAJOR ELEMENTS OF COMPONENTS MANAGEMENT
1) Job Analysis
Job analysis is the first step taken by the management in the
compensation management process. It includes identifying the
nature of the job, duties and responsibilities performed by
employees, their accountability towards the organisation, their
performance, etc. In simple terms, the characteristics of the job
form the basis for the compensation management process,
2) Job Evaluation
The next step in the process of compensation management is the
evaluation of different jobs in the organisation. It is the job
evaluation that determines the worth of the job. The nature of the
work and skills and duties required for a particular job forms the
basis for job evaluation. In the job evaluation method, the worth of
157
each job is assessed using various methods such as ranking,
grading, paired comparison, factor comparison, etc. These
evaluation methods are carried-out without any biasness to
identify the salary structure of various jobs.
3) Developing the Pay Structure
The pay structure depicts what an organisation pays to each
employee. Organisations can opt for narrow graded and broad
graded pay structures based on the significance and difficulty level
of the job.
4) Wages and Salary Survey
Before setting up a pay scale, the organisation must consider
external equity. For this, organisations use the wage and salary
survey method. With the help of the wage and salary survey
methods, organisations try to gather information from the labour
market about the salary given to the employees of the same level
or performing the same job in a similar industry.
Besides this, information related to the current wage rate, cost of
living, and rates during inflation and deflation. periods, etc., can
also be gathered through the labour market. There are two types
of survey methods, either the organisation can go to the labour
market and conduct the survey, or it can purchase the surveys
conducted by professional organisations.
5) Job Pricing
Determining pay rates for different jobs in the organisation is
known as job pricing. The job evaluation process and wage and
salary survey process form the basis for determining the job
prices. Before deciding the salary of the employee, the internal
worth and external worth of the job should be compared.
15.5. IMPORTANCE OF COMPENSATION MANAGEMENT
a) Compensation management is crucial to align employee efforts
with the aims and objectives of the organisation.
b) It helps in creating and developing a competent and motivated
workforce to achieve the set goals and targets of the organisation.
c) It helps to build a positive image of the organisation in society.
d) It eradicates social problems like bribery and theft. This is
because if the employees get a sufficient salary to sustain their
life, they are less likely to engage in such criminal activities.
e) It increases job contentment in employees and also enhances
their commitment level and loyalty.
f) It helps in improving organisational productivity.
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g) It aids the organisation to comply with the existing rules and
regulations set by the government regarding compensation.
Fig 15.1: Compensation Management Process
• Business Strategy
A business strategy refers to all the decisions taken, and actions
undertaken by a business for achieving the larger vision. Knowing
what a business strategy is and how to execute it properly can help
businesses become market leaders in their domain.
• HR Strategy
HR strategy is a roadmap for solving an organization's biggest

challenges with people-centric solutions. This approach requires
HR input during policy creation and elevates the importance of
recruitment, talent management, compensation, succession
planning and corporate culture.
• Compensation Policy
A compensation policy is a combination of the philosophy and
practices a company adopts when determining employees' pay,
rewards, and benefits. Every company will have its own
compensation policy, though you may find that certain industries
have similar or comparable approaches to pay and benefits.
• Job Evaluation and analysis
Job Evaluation is a process of determining the importance of a
particular job in relation to the other job of the organization. Job
159
Analysis is a comprehensive process while Job Evaluation is a
comparative process. Job Analysis is done to prepare a job
description and job specification.
• Design and Implement plan
A project implementation plan is a document that defines how a
project will be executed. Implementation plans explain the
strategic goals and steps involved in a project, define the project
completion timeline, and list the resources (including team
members) necessary for a successful project.
• Evaluation and review
Evaluation provides a systematic method to study a program,
practice, intervention, or initiative to understand how well it
achieves its goals. Evaluations help determine what works well
and what could be improved in a program or initiative. Program
evaluations can be used to demonstrate impact to funders.
15.6. COMPENSATION PLAN

A compensation plan refers to all the components of a compensation
package (wages, salaries, and benefits), the manner in which it will be
paid, and for what purpose employees receive bonuses, salary increases,
and incentives.
Compensation is an integral part of an employee’s sustenance and
survival which has a motivational element also.
An organization always wants to draw an effective compensation plan to
make their employees content and motivated.
An effective compensation plan fulfils the expectations of the employees
and satisfies them. At the same time, it works towards the overall fulfilment
of an organization’s objectives.
15.6.1. Compensation Rewards
Compensation rewards are offered to employees in return for their
acceptable performance. Again, compensation rewards can be of two
types – financial and non-financial. Financial rewards are given in terms
of money such as – salaries, commissions, etc., and non-financial rewards
are non-monetary but no less attrac-tive than financial rewards such as –
opportunity for growth, recognition, etc.
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15.6.2. Non-Compensation Rewards
Non-compensation rewards relate to the favourable work situations and
employee welfare, for example, a healthy job environment, consulting
salespeople on sales plans, assigning a salesperson to an attractive
territory, etc.
LET US SUM UP
In this unit, you have learnt about compensation management which is
the human resource management function that deals with all reward
individuals receive for performing an organizational task. Compensation
is what employees receive in exchange for their work. It is a particular
price, that is, the price of labor. Like any other price, remuneration is set
where the labor demand curve crosses the labor supply curve.
“Compensation includes direct cash payments, indirect payments in the
form of employee benefits, and incentives to motivate employees to strive
for higher levels of productivity.”
CHECK YOUR PROGRESS

1. Compensation can be _____ benefits.
a) Monetary
b) Non-monetary
c) both ‘a’ and ‘b’
2. Wages represent _____ rates of pay.
a) Hourly
b) Daily
c) Weekly
d) Monthly
3. _______ are also called ‘payments by results.
a) allowances
b) claims
c) incentives
d) fringe benefits
4. Incentives depends upon
a) productivity
b) sales
c) profits
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d) All of the above
5. The remuneration system needs to meet the following type(s) of equity
a) Internal
b) External
c) Individual
d) All of the above
GLOSSARY
Job Pricing : job pricing can be defined as the process to

determine the optimum pay values or
wages depending on the job that the employees
are performing in the organization
compared to internal as well as external
factors.
Wages : a payment usually of money for labor or

services usually according to contract
and on an hourly, daily, or piecework basis.
often used in plural. wages plural:
the share of the national product attributable to
labor as a factor in production.
recompense, reward.
SUGGESTED READINGS
1) Indranil Mutsuddi, (2011), Essentials of Human Resource
2) Kahok, M.A. (2012), Illustrated Case Studies in Indian Management,
WEB RESOURCES
1. Compensation Management | Types of compensation in HR
Management | Great Learning - Bing video
2. COMPENSATION AND BENEFITS - HRM Lecture 05 - Bing video
3. COMPENSATION MANAGEMENT - Bing video
1. c) 2. a) 3. c) 4. d) 5. d)
162
UNIT 16
JOB EVALUATIONS
STRUCTURE
Overview
Learning Objectives
16.1 Job Evaluation
16.2 Job evaluation methods
16.2.1. Ranking Method

16.2.2. Grading Method
16.2.3. Point method of job evaluation
16.2.4. Factor Comparison Method
16.3 Conducting Job Evaluations
16.4 Steps in Job Evaluations
16.4.1 Individual
16.4.2. Group
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings

OVERVIEW
In this unit, you will study on Job Evaluation which is a systematic and
orderly process of determining the worth of a job in relation to other jobs.
The objective of this process is to determine he correct rate of pay. It is
therefore not the same as job analysis. Rather it follows the job analysis
process, which provides the basic data to be evaluated
Job evaluation is the process of determining and quantifying the value of
jobs. It is the systematic scoring and comparison of jobs along
organizationally determined dimensions of job worth, such as, in the effort,
responsibility, complexity, importance, skills and the working conditions of
a job.
163
Job evaluation is a tool to compare jobs consistently and classify them
into appropriate pay ranges. The worth of each job within the organization
is determined through the Job Evaluation process (job analysis, job
descriptions, & job evaluations). This establishes the relative worth of a
job in relation to the value of other jobs in the workplace. The process can
ensure that an organization’s pay system is equitable, understandable,
legally defensible, and externally competitive. Job evaluations can be
used to help to attract desirable job candidates and retain high
performance employees due to fair and equitable pay scales
LEARNING OBJECTIVES
• examine the significance of job evaluation
• apply the techniques of external and internal job evaluation
• interpret the results of job evaluation
• explain good forecasting technique
16.1. JOB EVALUATION

Job evaluation is a systematic process of analysing and evaluating jobs
to determine the relative worth of job in an organization. It forms the basis
for designing the sound compensation system in an organization. Since
wage and salary administration and the perceived fairness of approach
adopted under it have a immense influence on employee morale,
motivation and satisfaction, proper job evaluation exercise demands
sensible consideration.
Job evaluation is the process of comparing a job against other jobs within
the organization to determine the appropriate pay rate. This toolkit
discusses the following topics:
Fig 16.1 Job Evaluation Methods
164
16.2. JOB EVALUATION METHODS
There are four basic methods of job evaluation: ranking method, job
grading method, point method and factor comparison method. Out of
these, the first two methods are non-quantitative and also known as
traditional, non-analytical or summary methods. The last two methods of
job evaluation are quantitative, also known as analytical methods, and
use various quantitative techniques in evaluating a job.
16.2.1. Ranking Method
In the ranking method of job evaluation, a whole job is compared with
others and rank is provided on the basis of this comparison. The usual
process followed in this method is as under:
1) On the basis of job analysis, each member of the job evaluation
committee ranks each job independently either against the
benchmark job or against all other jobs. The ranking is provided to
the job on the basis of this comparison.
2) In order to increase the reliability of ranking, this exercise is
undertaken twice or thrice by the members.
3) If there are significant differences of opinions among the members
about the ranking of a particular job, the matter is settled by mutual
consultation, or by working out the average
16.2.2. Grading Method
Job grading method also known as job classification method establishes
various grades for different categories of jobs. For example, jobs of an
operative may be classified as unskilled, semi-skilled, skilled and highly
skilled. The process followed in this method is as under:
1) At the initial stage. a number of job classes or grades is decided on
the basis of job analysis. Job grades can be determined on either of
two bases. First, all jobs may first be ranked, and their natural
classes may be determined. The description of each job class is
prepared covering all jobs falling in a class. Second, the job
evaluation committee may prepare a series of job class descriptions
in advance on the basis of which various jobs may be graded.
2) Different characteristics of each job are matched with description of
job class and a job is placed in the class with which it matches best.
16.2.3. Point method of job evaluation
It is widely used in business organisations. It is an analytical and
quantitative method which determines the relative worth of a job on the
basis of points allotted to each specific factor of a job. The sum total to
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these points allotted to various job factors is the worth of the job. This total
is compared with that of other jobs and relative worth of various jobs is
determined.
16.2.4 Factor Comparison Method
This method, also known as key job method, was originally developed at
the Philadelphia Rapid Transit Company, USA by Eugene J.Benge in
1926 to overcome two major problems faced in point method of job
evaluation. viz. determining the relative importance of factors and
describing their degrees. In this method, each factor of a job is compared
with the same factor of the other jobs or the key job either defined or
existing one. When all factors are compared, the final rating is arrived at
by adding the value received at each comparison. For this purpose, Benge
identified five factors – mental effort, skill, physical effort, responsibility
and working conditions.
16.3 CONDUCTING JOB EVALUATIONS
Job evaluation takes place early in the process of creating a

compensation system for the organization. The job evaluation process
may contrast with or be used in conjunction with market pricing, which
uses the labor market to set jobs' worth. This process, which may take
several months, is usually completed by a team of knowledgeable senior
employees who understand the functions of most of the organization's
jobs. To maintain objectivity, employers sometimes hire consultants to
complete this step in the compensation planning and design process.
Job evaluations are often confused with job analysis, but the two activities
differ drastically. A job analysis is the systematic process of examining
specific tasks and responsibilities related to a job, typically for writing a
job description.
Many job evaluation methods are subjective. Evaluators' decisions about
which jobs are worth more can be personal and emotional. If the team
members know the job incumbents, they may consider employees'
personal qualities as job factors. Outside consultants can help the team
have productive and objective discussions about job factors and their
relative weights.
Base pay, which establishes the standard of living, is the foundation for
total compensation. It also indicates the value the organization places on
an employee's role and contributions.
166
16.4 STEPS IN JOB EVALUATIONS
1) Specify the project's parameters, and gain approvals and support
from senior management.
2) Select an appropriate evaluation method or system.
3) Collect job data consistent with the method or system. This step
includes specifying trustworthy data collection techniques.
4) Analyze data, document job content and evaluate jobs.
5) Use points to develop job worth hierarchy, and group jobs into
grades based on appropriate breaks, or take another fair,
understandable, defensible and practical approach.
6) Allocate jobs to the existing pay structure or develop a new one.
7) Document system development, and establish operating
procedures, including policies for reconsidering decisions or a
formal appeals procedure.
8) Gain final approvals.
9) Implement and administer system.
10) Finally, organizations should employ a robust management-
employee communications program to help employees
understand how the organization makes pay decisions.
11) A point rating plan defines a number of factors, which are common
to the jobs being evaluated (job difficulty, accountability, job
knowledge, supervision given, contacts and working conditions).
Each factor is divided into two elements (i.e. job difficulty is divided
into complexity and judgement elements). The plan then provides
progressive degrees of definition within each element and
allocates a number of points to each degree. The combined factors
do not necessarily describe every aspect of a job.
16.4.1 Individual
Individual evaluation for performance appraisals measures an employee's
work against standard performance measures. Standard performance
measures are derived from individual job descriptions. Often, a direct link
exists between performance and pay based on an employee's job rating
from the appraisal. Team performance appraisals assess an individual's
contribution to the team. Team performance appraisals are appropriate to
support an organization's efforts to transition from an individual-based
organization to a team-based organization. Team performance appraisal,
for example, assess whether the team met its goals, produced a quality
product and worked well together.
167
16.4.2. Group
Management and organization techniques require the ability to effectively
coordinate teams toward the accomplishment of some goal. Rarely can a
single individual accomplish a task alone. Bringing people together with a
common purpose and providing them with the motivation and resources
to accomplish their task is a key management technique.
Organizing teams effectively requires a clearly identified and well-
communicated goal, the selection of the right people to participate on the
team, organization of the work to be done, clear instruction, ongoing
monitoring of progress, evaluation and follow-through. Start by identifying
the people within the organization who have the right skills, knowledge,
background and interests to contribute to the project. Gain approval from
their superiors as necessary. Explain the purpose of the team, the
expected outcomes of the team's work and the contributions expected of
each individual team member. Be available to offer guidance, support and
resources to team members as the project moves forward.
LET US SUM UP
International Labor Organization (ILO) has defined a job evaluation as:
“Job evaluation is an attempt to determine and compare demands which
the normal performance of a particular job makes on normal workers
without taking into account the individual performance of the workers
concerned”. In this unit, you have learnt the job evaluation and its
methods.
According to Alford and Beatty, “Job Evaluation is the application of the
Job Analysis technique to the qualitative measurement of relative job
worth, for the purpose of establishing consistent wage rate differentials by
objective means. It measures the differences between jobs on the job
requirements, and establishes the differential numerically (job rating), so
that it can be converted to wage rate after the wage level is determined”.
CHECK YOUR PROGRESS

1. The purpose of Job Evaluation is to determine
a) Worth of a job in relation to other jobs
b) Time duration of a job
c) Expenses incurred to make a job
168
2. Job Evaluation tries to make a systematic comparison between
a) Workers
b) Jobs
c) Machines
d) Departments
3. Basis of Job Evaluation is
a) Job design
b) Job ranking
c) Job analysis
d) Any of the above
4. The _________ provides the essential information on which each job
is evaluated.
a) Job ranking
b) Job enrichment
c) Job description
d) Job enlargement
5. A ______ is a written record of the duties, responsibilities and
conditions of the job.
a) Job ranking
b) Job enrichment
c) Job description
d) Job enlargement
e)
GLOSSARY
Job Description : A job description is a useful, plain-language tool

that explains the tasks, duties,
function and responsibilities of a position.
Ranking Method : Ranking method is a method of performance

appraisal. Ranking method is
the oldest and most conventional for of method.
169
SUGGESTED READINGS
Edition, HPH, India
WEB RESOURCES
1.https://www.aihr.com/blog/job-evaluation/
2.https://www.economicsdiscussion.net/human-resource-
management/job-evaluation/job-evaluation/32350
3. Lecture 1 Job Evaluation & Merit Rating - Bing video
4. Methods of Job Evaluation - Bing video
5. Lecture 2 Job Evaluation and Merit Rating - YouTube

1.a) 2.b) 3.c) 4.c) 5.c)
170
UNIT 17
INCENTIVES, BONUS AND OTHER
BENEFITS TO EMPLOYEES
STRUCTURE
Overview
Learning Objectives
17.1 Incentives
17.1.1. Long-Term Incentives
17.1.2. Short-Term Incentives
17.2 The importance of incentives
17.3 Monetary or Financial Incentives
17.4 Non-Monetary/Non-Financial Incentives

17.5 Kinds of Incentives
17.6 Types of Bonus Components
17.7 Bonus
17.8 Importance of Bonus
17.9 Merits of Bonus
17.10 Demerits of Bonus
17.11 Fringe Benefits
17.12 Kinds of Fringe Benefits
17.13 ESOP (Employee Stock Ownership Plan)
17.14 Tax Implication of ESOPs
17.15 Benefits of ESOPs for the employers
17.16 ESOP and Other Forms of Employee Ownership

Let us sum up
Check your progress
Glossary
Suggested Readings
171
OVERVIEW
In this unit, you are going to learn about various financial incentives
privileged by the employees of an organisation. According to Burack &
Smith, “An incentive scheme is a plan or programme to motivate individual
or group on performance. An incentive programme is most frequently built
on monitory rewards (incentive pay or monetary bonus) but may also
include a variety of non-monetary rewards or prizes.”
Incentives can be defined as monetary or non-monetary reward offered to
the employees for contributing more efficiency. Incentive can be extra
payment or something more than the regular salary or wage. Incentive
acts as a very good stimulator or motivator because it encourages the
employees to improve their efficiency level and reach the target.
LEARNING OBJECTIVES
• explain the objectives of incentives
• discuss the objectives of Bonus
• describe the Fringe Benefits policy
• examine the need for ESOP
17.1 INCENTIVES
Incentives are monetary benefits paid to workmen in lieu of their
outstanding performance. Incentives vary from individual to individual and
from period to period for the same individual. They are universal and are
paid in every sector. It works as motivational force to work for their
performance as incentive forms the part total remuneration.
Incentives when added to salary increase the earning thus increase the
standard of living. The advantage of incentive payment is reduced
supervision, better utilisation of equipment, reduced scrap, reduced lost
time, reduced absenteeism and turnover & increased output.
The main purpose of incentive is to tie employees’ rewards closely to their
achievements. This tie is done by providing more compensation for better
performance. Individual will generally strive for additional rewards by
higher production and their performance depends upon higher efforts.
Some people may prefer some extra time off rather than more money.
17.1.1. Long-Term Incentives
Long-term incentives are focused on an employee’s efforts on multi-
layered results, such as innovations, strategic suggestions to increase the
return on investments and increasing the market share or multi-layered
172
contributions to develop the organization’s competitiveness. These could
be indirect financial support to tax payee employees, social security plans,
pension plans, stock ownership, etc.
17.1.2. Short-Term Incentives
They are in addition to the basic pay provided within the current operating
year which could be supplemented to pay cheques or a separate amount
on a monthly, half yearly or yearly basis. This added income relates to the
employee’s achievement or special performance to benefit the
organization, such as 100% attendance, overtime, reduction in cost,
suggestion for improvement, long-term association with the organization,
etc.
17.2. THE IMPORTANCE OF INCENTIVES
a) The primary advantage of incentive is the inducement and
motivation of workers for higher efficiency and greater output,
b) Fixed remuneration removes fear of insecurity in the minds of
employ-ees (as incentive as a part of total remuneration)
c) Earnings of employees would be enhanced due to incentive.
d) Reduction in the total as well as unit cost of production through
incentives (because of higher productivity)
e) Production capacity is also likely to increase.
f) Incentive payments reduce supervision, better utilization of
equipment, reduce scrap, reduce loss time, and reduce
absenteeism and turnover.
Incentives can be short-term and/or long-term, which can be tied up with
the performance of an individual employee or a group/unit’s productivity.
Performance through incentives may be defined as cost saving, quantity
produced, standards met or quality improved, revenue generated, return
on investment or increased profit. This means that there are endless
possibilities.
17.3 MONETARY OR FINANCIAL INCENTIVES
The reward or incentive which can be calculated in terms of money is
known as monetary incentive. These incentives are offered to employees
who have more physiological, social and security need active in them.
Pay and allowances. Regular increments in salary every year and grant
of allowance act as good motivators. In some organizations pay hikes and
allowances are directly linked with the performance of the employee. To
get increment and allowance employees perform to their best ability.
173
Profits sharing. The organization offer share in the profits to the
employees as a common incentive for encouraging the employees for
working efficiently. Under profits sharing schemes generally the
companies fix a percentage of profits, and if the profits exceed that
percentage, then the surplus profits are distributed among the employees.
It encourages the employees to work efficiently to increase the profits of
the company so that they can get share in the profits.
Co-partnership/stock option. Sharing the profit does not give ownership
right to the employees. Many companies offer share in management or
participation in management along with share in profit to its employees as
an incentive to get efficient working form the employees. The co-
partnership is offered by issue of shares on exceeding a fixed target.
Bonus. Bonus is a onetime extra reward offered to the employee for
sharing high performance. Generally, when the employees reach their
target or exceed the target then they are paid extra amount called bonus.
Bonus is also given in the form of free trips to foreign countries, paid
vacations or gold etc. some companies have the scheme of offering bonus
during the festival times.
Commission. Commission is the common incentive offered to employees

working under sales department. Generally, the sales personal get the
basic salary and also with this efforts put in by them. More orders mean
more commission.
Suggestion system. Under suggestion system the employees are given
reward if the organization gains with the suggestion offered by the
employee. For example, if an employee suggests a cost saving technique
of then extra payment is given to employee for giving that suggestion. The
amount of reward or payment given to the employee under suggestion
system depends on the gain or benefit which organization gets with that
suggestion it is a very good incentive to keep the initiative level of
employees high.
Productivity linked with wage incentives. These are wage rate plans which
offer higher wages for more productivity. Under differential piece wage
system efficient workers are paid higher wages as compared to inefficient
workers. To get higher wages workers perform efficiently.
Retirement benefits. Some organizations offer retirement benefits such as
pension, provident fund, gratuity etc. to motivate people. These incentives
are suitable for employees who have security and safety need.
Perks/ fringe Benefits/ perquisites. If refers to special benefits such as
medical facility, free education for children, housing facility etc. these
174
benefits are over and above salary. These extra benefits are related with
the performance of the employees.
17.4 NON-MONETARY/NON-FINANCIAL INCENTIVES
Money is not the only motivator, the employees who have more of esteem
and self-actualization need active in them get satisfied with the non-
monetary incentives only. The incentives which cannot be calculated in
terms of money are known as non-monetary incentives. Generally, people
working at high job position or at high rank get satisfied with non-monetary
incentives. The common means or ways of non-monetary incentives are:
1) Status. Status refers to rank, authority, responsibility, recognition
and prestige related to job. By offering higher status or rank in the
organization managers can motivate employees having esteem
and self- actualization need active in them.
2) Organizational climate. It refers to relations between superior/
subordinates. These are the characteristics which describe and
organization. These characteristics have direct influence over the
behaviour of a member. A positive approach adapted by manager
creates better organizational climate whereas negative approach
may spoil the climate, Employees are always motivated in the
healthy organizational climate.
3) Career advancement. Managers must provide promotional
opportunities to employees. Whenever there are promotional
opportunities, employees improve their skill and efficiency with the
hope that they will be promoted to high level. Promotion is a very
big stimulator or motivator which induces people to perform to their
best level.
4) Job enrichment/ assignment of challenging job. Employees
get bored by performing routine job. They enjoy doing jobs which
offer them variety and opportunity to show their skill. By offering
challenging jobs, autonomy to perform job, interesting jobs,
employees get satisfied, and they are motivated. Interesting,
enriched and challenging job itself is a very good motivator or
stimulator.
5) Employee’s recognition. Recognition means giving special
regard or respect which satisfies the ego of the subordinates. Ego-
satisfaction is a very good motivator. Whenever the good efforts
or the positive attitudes are show by the subordinates then it must
be recognized by the superior in public or in presence of other
employees. Whenever if there is any negative attitude or mistake
is done by subordinate then it should be discussed in private by
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calling the employee in cabin. Examples of employee’s recognition
are congratulating employee for good performance, displaying the
achievement of employee, giving certificate of achievement,
distributing mementos, gifts etc.
6) Job security. Job security means lifetime bonding between
employees and organization. Job security means giving
permanent or confirmation letter. Job security ensures safety and
security need, but it may have negative impact. Once the
employees get job secured, they lose interest in job. Of example
government employees do not perform efficiently as they have no
fare of losing job. Job security must be given with some terms and
conditions.
7) Employee’s participation. It means involving employee in
decision making especially when decisions are related to workers.
Employees follow the decision more sincerely when these are
taken in consultation with them for example if target production is
fixed by consulting employee, then he will try to achieve the target
more sincerely.
8) Autonomy/ employee empowerment. It means giving more
freedom to subordinates. This empowerment develops confidence
in employees. They use positive skill to prove that they are
performing to the best when freedom is given to them.
17.5 KINDS OF INCENTIVES
1) Individual and Organizational Incentives- According to L.G.
Magginson, “Individual incentives are the extra compensation paid to
an individual for all production over a specified magnitude which
stems from his exercise of more than normal skill, effort or
concentration when accomplished in a predetermined way involving
standard tools, facilities and materials.” Individual performance is
measured to calculate incentive whereas organizational or group
incentive involve cooperation among employees, management and
union and purport to accomplish broader objectives such as an
organization-wide reduction in labour, material and supply costs,
strengthening of employee loyalty to company, harmonious
management and decreased turnover and absenteeism
2) Financial and Non-financial Incentives- Individual or group
performance can be measured in financial terms. It means that their
performance is rewarded in money or cash as it has a great impact
on motivation as a symbol of accomplishment. These incentives form
visible and tangible rewards provided in recognition of
accomplishment. Financial incentives include salary, premium,
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reward, dividend, income on investment etc. On the other hand, non-
financial incentives are that social and psychological attraction which
encourages people to do the work efficiently and effectively. Non-
financial incentive can be delegation of responsibility, lack of fear,
worker’s participation, title or promotion, constructive attitude,
security of service, good leadership etc.
3) Positive and Negative Incentives- Positive incentives are those
agreeable factors related to work situation which prompt an individual
to attain or excel the standards or objectives set for him, whereas
negative incentives are those disagreeable factors in a work situation
which an individual wants to avoid and strives to accomplish the
standards required on his or her part. Positive incentive may include
expected promotion, worker’s preference, competition with fellow
workers and own ‘s record etc. Negative incentives include fear of
lay off, discharge, reduction of salary, disapproval by employer etc.
17.6 BONUS
Bonus is the extra payment or financial component which is received as
a reward for doing one’s job well. Bonus usually comes along with salary
of the employee. It is the gesture of appreciation from the organization
towards their employees. Bonus is given globally in most of the
organization across different nations.
Bonus is the extra payment or financial component which is received as

a reward for doing one’s job well. Bonus usually comes along with salary
of the employee. It is the gesture of appreciation from the organization
towards their employees. Bonus is given globally in most of the
organization across different nations. It is not only given for the job well
done but also to keep the employees motivated and focused. This is either
given during the festivals as well such as Diwali, Christmas, etc. or is part
of the salary structure of the employee. The distribution of the bonus
completely depends upon the policies of the organization. The amount of
the incentive depends upon the profitability of the organization.
17.7. TYPES OF BONUS COMPONENTS
The various types of additional incentives which can be paid to an
employee are:
1. Performance Bonus
This kind is given to employees based on their performance in a given
period e.g., year or quarter
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2. Festival Bonus
This type is linked to some occasion or festival in the local location of
operations of the company e.g., New Year
3. Referral Bonus
Many companies have a referral program where in employees refer other
candidates to the company. If a company has a referral program, then on
a successful referral the existing employee can be given an incentive.
Fig.17.1 Bonus
4. Joining Bonus
When a new employee joins a company, he or she can be offered a
onetime joining amount.
This is a bonus which is given at a very early stage of employee's career
path in a company as compared to other types of bonuses.
5. Retention Bonus
This is given as a onetime payment to retain the employee in the
organization.
6. Miscellaneous
This can be given on some special event e.g., on 25th anniversary of the
company, every employee gets a smartphone. The above list consists of
the common bonus types we have in various companies. There can be
very specific bonuses which a company gives to their employees as well.
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17.8 IMPORTANCE OF BONUS
The reason of the payment of bonus is basically to bridge the gap between
the ideal of a living wage and the wages paid. These payments keep
employees motivated throughout the year as they anticipate payment over
and above their wages. A good amount can lead to retention of talent and
overall improvement of employee relationship within the organization as
well.
In India the practice of paying an incentive was first started during the
World War 1 when few textile mills granted 10% of wages as the war
incentive in 1917, under rule 81A of Defence of India Rules. On the 6th of
December 1960 the Government of India appointed a bonus commission
which was later replaced by the Payment of Bonus Act, 1965.
17.9 MERITS OF BONUS
Some key advantages are:
1) These components keep the employees motivated.
2) It bridges the gap between the ideal of a living wage and the wages
paid.
3) The gesture shows that the organization values and
acknowledges good work.
17.10 DEMERITS OF BONUS
Some disadvantages are:
1) It adds to the extra cost incurred by the organization.
2) It decreases the profits.
3) It increases the expectation of the workers for an incentive on
every accomplishment.
17.11 FRINGE BENEFITS
Employees are paid several benefits in addition to wages, salary,
allowances and bonus. These benefits and services are called ‘fringe
benefits’ because these are offered by the employer as a fringe.
Employees of the organization are provided several benefits and services
by the employer to maintain and promote employee’s favourable attitude
towards the work and work environment. It not only increases their morale
but also motivate them. These provided benefits and services forms the
part of salary and are generally refereed as fringe benefits.
Fringe benefits include status (cars, entertainment facilities, holidays,
foreign travel, telephone); security (insurance, medical facilities, children’s
education), and work benefits (office ac-commodation, secretarial
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services, management training, company scholarships etc.). Key benefits
are benefits such as share schemes, profit sharing, and retirement
counselling house purchase.
Fringe benefits are supplementary compensation made in addition to
wages, the object being to stimulate the interest of the workers and to
make the job more attractive and conducive. They are, as a matter of fact,
indirect benefits. As to their nature, we can say, they are neither mere
“fringes” nor peripheral “wage trimmings” but a substantial part of the
wage and salary structure.
To quote Belcher, these benefits are “any wage cost not directly
connected with employee’s productive effort, performance, service or
sacrifice”. Webster defines “fringe” as “an ornamental border, an edging,
trimming or a margin”. However, these benefits are aimed at attracting
and retaining efficient and contented workforce through boosting up of
their real earnings.
There are wide variations in opinions as to the benefits covered by the

term “fringe benefits”. We quote here Fisher and Chapman according to
whom the classification of fringe benefits is – (a) premiums for time
worked(b) pay for time not worked (c) employee benefits, and (d)
employee activities.
In India, the government has prescribed certain minimum amenities to be
provided by employers to workers. Indirect benefits are fringe benefits, but
it is very difficult to distinguish between direct wages and indirect benefits.
For instance, conducive working conditions benefit the employer directly,
overtime wage paid for work done cannot be described as indirect benefit.
Cockman defines employee benefits as “those benefits supplied by an
employer, to or for, the ben-efit of an employee which are not in the form
of wages, salaries and time-related payments”. According to him, benefits
are basically of two types – fringe and key.
Fringe benefits include status (cars, entertainment facilities, holidays,
foreign travel, telephone); security (insurance, medical facilities, children’s
education), and work benefits (office accommodation, secretarial
services, management training, company scholarships etc.). Key benefits
are benefits such as share schemes, profit sharing, and retirement
counselling house purchase.
Fringe benefits afford better living standard to the employees and offer
opportunities to the employer to have more productivity and production.
So, they are relevant and useful for an organisation provided it can afford
to extend fringe benefits. In term, of cost, these benefits constitute “the
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real total cost to the company of employing the employee” (Beath &
Rands). It cannot be denied that fringe benefits are regarded as a “bonus”
and, as such, they create a favourable attitude towards the particular job
and company.
Benefits that have no relation to employment or wages should not be
regarded as fringe benefits, even though they may constitute a significant
part of the worker’s total income. This is fairly obvious in the case of public
parks, sanitation services, and public and fire protection.
Fringe benefit, any nonwage payment or benefit (e.g., pension plans,
profit-sharing programs, vacation pay, and company-paid life, health, and
unemployment insurance programs) granted to employees by employers.
It may be required by law, granted unilaterally by employers, or obtained
through collective bargaining.
Fig.17.2 Fringe Benefits
• Employee Stock Option

The term employee stock option (ESO) refers to a type of equity
compensation granted by companies to their employees and
executives. Rather than granting shares of stock directly, the company
gives derivative options on the stock instead.
• Interest Free Loans
Interest-free loans are exactly what they sound like loans that charge
no interest. It's important to know that this does not necessarily mean
that the loan is free. There are three main ways that advertisers market
interest-free loans but still get you to pay up one way or another.
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• Higher education assistance
Employee Reimbursement Programs are part of a company's benefits
package and its employee upskilling policy. Many companies allow
employees to take up technical courses, the fee for which the
company will reimburse based on certain criteria.
• Car or cab facilities
Cab facility means a facility of providing cabs for commuting to office
and home every day for employees by the company.
Few companies especially software.
• Access to health club
A health club is a place that houses exercise equipment for the
purpose of physical exercise. A man and a woman doing weight
training. View of a health club. A health club (also known as a fitness
club, fitness center, health spa, and commonly referred to as a gym)
is a place that houses exercise equipment for the purpose of physical
exercise.
Examples of fringe benefit
(a) Statutory benefits – The Employees Provident Fund Scheme,
Gratuity or Pension Schemes and Employees State Insurance Scheme.
(b) Non--statutory benefits – Payments towards Employees Provident
Fund Scheme, Gratuity and Pension Fund contribution, medical facilities,
canteens, uniform and recreational facilities.
Fringe benefits also cover profit and other kinds of bonus such as
attendance bonus, service bonus and gratuities, loans for house
purchases, leave travel concession, children’s free education, fair price
shops for essential commodities, loans for purchase of car.
Fringe benefits, in spite of some of these drawbacks, have come to stay.
They have now become an important part of compensation plans
According to ILO fringe benefits has been described as – “Wages are
often augmented by special cash benefits, by the provisions of medical
and other services or payments in kind that form part of the wage for
expenditure on the goods and services.
According to D. Belcher, “Fringe benefits are any wage cost not directly
connected with the employee’s productive effort, performance, service or
sacrifice”. According to Werther and Davis, “Fringe embrace a broad
range of benefits and services that employees receive as part of their total
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compensation, package pay or direct compensation and is based on
critical job factors and performance”.
17.12. KINDS OF FRINGE BENEFITS
The various organizations in India offers fringe benefits that may be
categorized as follows:
1) Old Age and Retirement Benefits - these include provident fund
schemes, pension schemes, gratuity and medical benefits which
are provided to employee after their retirement and during old age
as a sense of security about their old age.
2) Workman’s Compensation - these benefits are provided to
employee if they are got ignored or die under the working
conditions and the sole responsibility is of the employer.
3) Employee Security- Regular wage and salary is given to
employee that gives a feeling of security. Other than this
compensation is also given if there is lay-off or retrenchment in an
organization.
4) Payment for Time Not Worked – Under this category of benefits,
a worker is provided payment for the work that has been
performed by him during holidays and also for the work done
during odd shifts. Compensatory holidays for the same number in
the same month are given if the worker has not availed weekly
holidays.
5) Safety and Health – Under this benefit workers are provided
conditions and requirements regarding working condition with a
view to provide safe working environment. Safety and Health
measures are also taken care of in order to protect the employees
against unhealthy working conditions and accidents.
6) Health Benefits – Employees are also provided medical services

like hospital facility, clinical facility by the organization.
17.13 ESOP (Employee Stock Ownership Plan)
An employee stock ownership plan (ESOP) is an employee benefit plan
that gives workers ownership interest in the company. ESOPs give the
sponsoring company, the selling shareholder, and participants receive
various tax benefits, making them qualified plans. Companies often use
ESOPs as a corporate-finance strategy to align the interests of their
employees with those of their shareholders.
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Definition: An employee stock ownership plan (ESOP) is a type of
employee benefit plan which is intended to encourage employees to
acquire stocks or ownership in the company.
Description: Under these plans, the employer gives certain stocks of the
company to the employee for negligible or less costs which remain in the
ESOP trust fund, until the options vests and the employee exercises them,
or the employee leaves/retires from the company or institution.
These plans are aimed at improving the performance of the company and
increasing the value of the shares by involving stockholders, who are also
the employees, in the working of the company. The ESOPs help in
minimizing problems related to incentives.
An ESOP (Employee stock ownership plan) refers to an employee benefit
plan which offers employees an ownership interest in the organization.
Employee stock ownership plans are issued as direct stock, profit-sharing
plans or bonuses, and the employer has the sole discretion in deciding
who could avail of these options. However, Employee stock ownership
plans are just options that could be purchased at a specified price before
the exercise date. There are defined rules and regulations laid out in the
Companies Rules which employers need to follow for granting of
Employee stock ownership plans to their employees.
An organization grants ESOPs to its employees for buying a specified
number of shares of the company at a defined price after the option period
(a certain number of years). Before an employee could exercise his
option, he needs to go through the pre-defined vesting period which
implies that the employee has to work for the organization until a part or
the entire stock options could be exercised.
Organizations often use Employee stock ownership plans as a tool for
attracting and retaining high-quality employees. Organizations usually
distribute the stocks in a phased manner. For instance, a company might
grant its employees the stocks at the close of the financial year, thereby
offering its employees an incentive for remaining with the organization for
receiving that grant. Companies offering ESOPs have long-term
objectives. Not only companies wish to retain employees for a long-term,
but also intend making them the stakeholders of their company. Most of
the IT companies have alarming attrition rates, and ESOPs could help
them bring down such heavy attrition Start-ups offer stocks for attracting
talent. Often such organizations are cash-strapped and are unable to offer
handsome salaries. But by offering a stake in their organization, they
make their compensation package competitive.
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Advantages of ESOPs
Since ESOP shares are part of the employees’ remuneration package,
companies can use ESOPs to keep plan participants focused on
corporate performance and share price appreciation. By giving plan
participants an interest in seeing the company’s stock perform well, these
plans supposedly encourage participants to do what’s best for
shareholders, since the participants themselves are shareholders.
The Bottom Line
ESOPs are generally a win-win for employers and employees,
encouraging greater effort and commitment in exchange for bigger
financial rewards. However, they are not always straightforward and can
be frustrating if the participant doesn’t fully understand the terms of their
particular plan.
Not all ESOPs are the same. Rules on actions such as vesting and
withdrawals can vary, and it’s important to be aware of them to make the
most of this benefit and not potentially miss out on a big extra bonus.
17.14. TAX IMPLICATION OF ESOPS
Employee stock ownership plans is considered as perquisites with respect
to taxation. On the other hand, for an employee, ESOPs are taxed at two
below-mentioned instances.
While exercising – in form of a prerequisite. When an employee exercises
his option, the difference between Fair Market Value (FMV) as on date of
exercise and the exercise price is taxed as a perquisite.
While selling – in the form of capital gain. An employee might sell his
shares after buying them. In case he sells these shares at a price higher
than FMV on the exercise date, he would be liable for capital gains tax.
The capital gains would be taxed depending on the period of holding. This
period is calculated from the date of exercise up to the date of sale. Equity
shares which are listed on the recognized stock exchange are considered
as long-term capital if they’re held for more than 12 months i.e., 1 year. In
case the shares are sold within 12 months, these are then considered as
short term. Presently, long-term capital gains (LTCG) on the listed equity
shares are exempt from tax. However as per the recent amendments in
Budget 2018, Sale of equity shares that are held for more than a year on
or after 1st April 1, 2018, would attract tax at the rate of 10% and cess of
4%. Short-term capital gains (STCG) are taxed at a rate of 15%.
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17.15 BENEFITS OF ESOP FOR THE EMPLOYERS
Stock options are provided by an organization as a motivation to its
employees. As the employees would benefit when the company’s share
prices soar, it would be an incentive for the employee put in his 100
percent. Although motivation, employee retention and awarding hard work
are the key benefits which ESOP brings to the employers, there are
several other noteworthy advantages too.
With the help of ESOP options, organizations could avoid the cash
compensations as a reward, thus saving on immediate cash outflow. For
organizations which are starting their business operations on a bigger
scale or expanding their business, awarding their employees with ESOPs
would work out to be the most feasible option than the cash rewards.
ESOP Up-front Costs and Distributions
Companies often provide employees with such ownership with no up-front
costs. The company may hold the provided shares in a trust for safety and
growth until the employee retires or resigns.
When a fully vested employee retires or resigns from the company, the
firm “purchases” the vested shares back from them. The money goes to
the employee in a lump sum or equal periodic payments, depending on
the plan.
Once the company purchases the shares and pays the employee, the
company redistributes or voids the shares. Employees who leave the
company voluntarily cannot take the shares of stock with them, only the
cash payment.
How to Cash Out of an ESOP
Being vested doesn’t necessarily mean you can cash out of your ESOP.
Generally, it’s only possible to redeem these shares if you terminate
employment, retire, die, or become disabled.
Age is often an important factor. Distributions are rarely permitted to
people under 59½—or 55 if terminated—and, if they are allowed, they
could be subject to a 10% early withdrawal penalty. Specific information
about how to cash out of an ESOP can be found in the terms listed in the
plan’s guidelines.
17.16 ESOP AND OTHER FORMS OF EMPLOYEE OWNERSHIP
Stock ownership plans provide packages that act as additional employee
benefits and embody the corporate culture that company managements
want to maintain. Other versions of employee ownership include direct-
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purchase programs, stock options, restricted stock, phantom stock, and
stock appreciation rights.
Direct stock purchase plan (DSPP) lets employees purchase shares of
their respective companies with their personal after-tax money. Some
countries provide special tax-qualified plans that let employees purchase
company stock at discounted prices.
Restricted stock gives employees the right to receive shares as a gift or a
purchased item after meeting particular restrictions, such as working for a
specific period or hitting specific performance targets.
Stock options provide employees the opportunity to buy shares at a fixed
price for a set period.
Phantom stock provides cash bonuses for good employee performance.
These bonuses equate to the value of a particular number of shares.
Stock appreciation rights give employees the right to raise the value of an
assigned number of shares. Companies usually pay these shares in cash.
LET US SUM UP
In this unit, you have understood about the financial incentive given to the
employees of an organistion. An incentive is an object or item of value or
desired action or event that spurs an employee to do more of whatever
was encouraged by the employer through the chosen incentive. A bonus
is a one-time extra reward offered to the employee for sharing high
performance work. Generally, when the employees reach their target or
exceed the target then they are paid an extra amount called as bonus.
Bonus is also given in the form of free trips to foreign countries, paid
vacations or gold, etc as apart from monetary benefits these are also a
booster. some companies have the scheme of offering bonus during the
festival times to boost them. Fringe benefits If refers to special benefits
such as medical facility, free education for children, housing facility and a
lot more. These benefits are over and above salary. These extra benefits
are related to the performance of the employees.
CHECK YOUR PROGRESS

1. Wages are paid to the ------- ?
a) employee b) labor
c) Manager d) Board of director
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2. Minimum Wages Act?
a) 1948 b) 1949
c) 1958 d) 1979
3. Which is not the objective of Compensation?
a) To establish equity
b) To Improve Employee Efficiency
c) To Control Cost
d) To Comply with illegal Regulation
4. Compensation is reward to the employee for them?

a) Performance
b) Work
c) Contribution to organization
d) Smartness
5. Who is Responsible for compensation decision making?
a) HR Unit & Manager

b) Worker c
c) laymen
d) BOD
GLOSSARY
ESOP : ESOP stands for employee stock ownership

plan. An ESOP grants company stock to
employees, often based on the duration of
their employment.
Fringe benefits : fringe benefit, any nonwage payment or

benefit (e.g., pension plans, profit-sharing
programs, vacation pay, and company-paid
life, health, and unemployment insurance
programs) granted to employees by
employers.
Wages : a payment usually of money for labor or

services usually according to contract and on
an hourly, daily, or piecework basis.
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SUGGESTED READINGS
1. Robert L Mathis, John H Jackson, ManasRanjanTripathy
(2012),“Human Resource Management- A South Asian Perspective ”,
latest Edition, Cengage Learning, India
2. SeemaSanghi, (2012) “Human Resource Management” , latest
3. ShyamkantGokhale (2012),“Personal Management”, latest Edition,
WEB RESOURCES
1. Staff Incentives – Bonus vs. Benefits - YouTube
2. Top 4 Benefits Employees Value Most | AIHR Learning Bite - YouTube
3. Types of Bonuses I Give To My Employees - YouTube
4. IAS 19 Employee Benefits: Summary 2020 - YouTube
1.b) 2.a) 3.d) 4.c) 5.a)
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BLOCK 5
QUALITY OF WORK LIFE
Unit 18. Quality of Work Life

Unit 19. Management by Objectives
Unit 20. Employee Participation in
Management
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UNIT 18
QUALITY OF WORK LIFE
STRUCTURE
Overview
Learning Objectives
18.1 Quality of Working life - Meaning
18.2 Issues in Quality of Working life
18.2.1. Pay
18.2.2. Benefits
18.2.3. Job Security
18.2.4. Alternative work schedule
18.3 Enhancing quality of work life are
18.4 Obstacles in QWL
18.5 Quality Circles
18.6 Set up of Quality Circle
18.7 Characteristics of Quality Circle
18.8 Advantages of Quality Circles
Let us sum up
Check your progress
Glossary
Suggested Reading
Overview
In this unit, you will learn about the Quality of Work Life (QWL) which is a
term that had been used to describe the broader job-related experience
an individual has. It has been differentiated from the broader concept of
quality of life. To some degree, this may be overly simplistic, as Elizur and
Shye concluded that quality of work performance is affected by quality of
life as well as quality of working life. However, it will be argued here that
the specific attention to work-related aspects of quality of life is valid.
LEARNING OBJECTIVES

• explain the concept of Quality of work life
• explore the Quality circle
• discuss the purpose of Management by objective
• discuss talent management and competency mapping
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18.1 QUALITY OF WORK LIFE - MEANING
Quality of work life (QWL) refers to the favourableness or
unfavourableness of a job environment for the people working in an
organisation. The period of scientific management which focused solely
on specialisation and efficiency, has undergone a revolutionary change.
The traditional management (like scientific management) gave
inadequate attention to human values. In the present scenario, needs and
aspirations of the employees are changing. Employers are now
redesigning jobs for better QWL.
Lloyd Suttle defines QWL as – “the degree to which members of a
particular organisation are able to satisfy important personal needs
through their experiences in the organisation”. For example, providing
ample opportunities to workers to directly participate in problem-solving
and decision-making, particularly in their work-related areas is considered
to be a necessary condition for greater freedom at work and leads to self-
development, self-control or self- direction, ultimately leading towards
better QWL.
Quality of Work-Life is a value-based process, which is aimed towards
meeting the twin goals of enhanced effectiveness of the organisation and
improved quality of life at work for the employees.”
Quality of Work-Life is a generic phrase that covers a person’s feelings
about every dimension of work including economic rewards and benefits,
security, working conditions, organisational and interpersonal
relationships and its intrinsic meaning in a person’s life.
The success of any organisation is highly dependent on how it attracts,
recruits, motivates, and retains its workforce. Today’s organisations need
to be more flexible so that they are equipped to develop their workforce
and enjoy their commitment. Therefore, organisations are required to
adopt a strategy to improve the employees’ quality of work life (QWL) to
satisfy both the organisational objectives and employee needs.
Quality of Working Life (QWL) is a term that had been used to describe
the broader job-related experience an individual has. It has been
differentiated from the broader concept of quality of life. To some degree,
this may be overly simplistic, as Elizur and Shye concluded that quality of
work performance is affected by quality of life as well as quality of working
life. However, it will be argued here that the specific attention to work-
related aspects of quality of life is valid.
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Whilst quality of life has been more widely studied, quality of working life,
remains relatively unexplored and unexplained. A review of the literature
reveals relatively little on quality of working life. Where quality of working
life has been explored, writers differ in their views on its core constituents.
It is argued that the whole is greater than the sum of the parts as regards
quality of working life, and, therefore, the failure to attend to the bigger
picture may lead to the failure of interventions which tackle only one
aspect. A clearer understanding of the inter-relationship of the various
facets of quality of working life offers the opportunity for improved analysis
of cause and effect in the workplace.
This consideration of quality of working life as the greater context for
various factors in the workplace, such as job satisfaction and stress, may
offer opportunity for more cost-effective interventions in the workplace.
The effective targeting of stress reduction, for example, may otherwise
prove a hopeless task for employers pressured to take action to meet
governmental requirements.
Work-life balance is balancing the priorities of career goals and family
goals. Career goals include promotions, employment status, monetary
earnings and the like. Family goals include spending more time with family
members for spiritual activities, pleasure leisure, health, education and
careers of family members. This concept reduces the gap between work
and family in the process of balancing the demands of both. Certain jobs
like allow work-life balance.
Quality of Work Life (QWL) is an improvised HRD mechanism which
attempts to design and to develop the work environments for the
employees working at all levels. It is one of the major issues faced by the
organisations. QWL is not only related to the achievement of greater
human satisfaction, but also aims at improving productivity, adaptability
and effectiveness of organisations.
QWL includes the attempts to achieve integration among the
technological, human, organisational and societal demands (the factors
of work environments) so as to maximise the benefits for enriching the
human factor.
QWL is not based on any theory or any technique, but it is concerned with
the overall climate of work, the impact of work on people and the
organisational effectiveness. The basic purpose is to change the work
environment, which will lead towards a better QWL and ultimately to an
improved quality of life in the community/society.
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Lloyd Suttle defines QWL as – “the degree to which members of a
particular organisation are able to satisfy important personal needs
through their experiences in the organisation”. For example, providing
ample opportunities to workers to directly participate in problem-solving
and decision-making, particularly in their work-related areas is considered
to be a necessary condition for greater freedom at work and leads to self-
development, self-control or self- direction, ultimately leading towards
better QWL.
Quality of Work-Life is a generic phrase that covers a person’s feelings
about every dimension of work including economic rewards and benefits,
security, working conditions, organisational and interpersonal
relationships and its intrinsic meaning in a person’s life. It is a process by
which an organisation attempts to unleash the creative potential of its
personnel by involving them in decisions affecting their work lives.
A distinguish characteristic of the process is that its goals are not simply
extrinsic focusing on the improvement of productivity and efficiency, they
are also intrinsic, regarding what the workers see as self-fulfilling and self-
enhancing ends in themselves. The essential component of any QWL
improvement programme is the existence of a genuine opportunity for
individuals or task groups at any level in the organisation to influence their
working environment.
During 1979, the American Society of Training and Development created

a ‘Task Force’ on the quality of working life, which defined the concept of
quality of working life (QWL)
“QWL is a process of work organisations which enables its members at
all levels to participate actively and efficiently in shaping the organisation’s
environment, methods and outcomes. It is a value-based process, which
is aimed towards meeting the twin goals of enhanced effectiveness of the
organisation and improved quality of life at work for the employees.”
Quality of Work-Life is the degree to which members of a work
organisation are able to satisfy their personal needs through their
experience in the organisation. Its focus is on the problem of creating a
human work environment where employees work cooperatively and
contribute to organisational objectives. The major indicators of QWL are
job involvement, job satisfaction and productivity.
According to Johnstorn, Alexander and Robin, QWL is more than simply
a concept, means or an end.
Quality of work life is a multifaceted concept. The premise of quality of
work life is having a work environment where an employee’s activities
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become more important. This means implementing procedures or policies
that make the work less routine and more rewarding for the employee.
These procedures or policies include autonomy, recognition, belonging,
progress and development and external rewards.
“QWL is an indicator of how free the society is from exploitation, injustice,
inequality, oppression and restrictions on the continuity of the growth of a
man. What is most important in India at this stage is developing
consciousness among all sections of industry i.e. workers, Unions and
management. Success of any organisation much depends upon the
healthy equation amongst these three players”.
The term Quality of Work Life (QWL) aims at changing the entire
organizational climate by humanizing work, individualizing organizations
and changing the structural and managerial systems. It takes into
consideration the socio-psychological needs of the employees. It seeks to
create such a culture of work commitment in the organizations which will
ensure higher productivity and greater job satisfaction for the employees.
Quality of work life refers to the favorableness or unfavorableness of the
job environment of an organization for its employees. It is generic term
which covers a person’s feelings about every dimension of his work e.g.,
economic incentives and rewards, job security, working conditions,
organizational and interpersonal relationships etc. The term QWL has
different meanings for different people. A few important definitions of
Quality of Work Life (QWL) are as follows:
According to Harrison: “Quality of Work Life is the degree to which work
in an organization contributes to material and psychological wellbeing of
its members.”
According to D.S.Cohan “Quality of Work Life is a process of joint decision
making, collaborations and building mutual respect between management
and employees.”
According to the American Society of Training and Development “Quality
of Work Life is a process of work organization which enables its members
at all levels to participate actively and effectively in shaping the
organizations’ environment, methods and outcomes. It is a value-based
process which is aimed towards meeting the twin goals of enhanced
effectiveness of the organization and improved quality of life at work for
the employees”.
Quality of Work Life influences the productivity of the employees.

Researchers have proved that good QWL leads to psychologically and
physically healthier employees with positive feelings.
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Richard E. Walton explains quality of work life in terms of eight broad
conditions of employment that constitute desirable quality of work life. He
proposed the same criteria for measuring QWL. Those criteria include:
Measuring QWL
• Adequate and Fair Compensation: There are different opinions
about adequate compensation. The committee on Fair Wages
defined fair wage as” . . . the wage, which is above the minimum
wage, but below the living wage.”
• Safe and Healthy Working Conditions: Most of the organizations
provide safe and healthy working conditions due to humanitarian
requirements and/or legal requirements. In fact, these conditions are
a matter or enlightened self-interest.
• Opportunity to Use and Develop Human Capacities: Contrary to
the traditional assumptions, QWL is improved… “to the extent that
the worker can exercise more control over his or her work, and the
degree to which the job embraces and entire meaningful task” … but
not a part of it. Further, QWL provides for opportunities like
autonomy in work and participation in planning in order to use
human capabilities.
• Opportunity for Career Growth: Opportunities for promotions are
limited in case of all categories of employees either due to
educational barriers or due to limited openings at the higher level.
QWL provides future opportunity for continued growth and security
by expanding one’s capabilities, knowledge and qualifications.
• Social Integration in the Work Force: Social integration in the
work force can be established by creating freedom from prejudice,
supporting primary work groups, a sense of community and inter-
personnel openness, legalitarianism and upward mobility.
• Constitutionalism in the Work Organization: QWL provides
constitutional protection to the employees only to the level of
desirability as it hampers workers. It happens because the
management’s action is challenged in every action and bureaucratic
procedures need to be followed lat that level. Constitutional
protection is provided to employees on such matters as privacy, free
speech, equity and due process.
• Work and Quality of Life: QWL provides for the balanced
relationship among work, non-work and family aspects of life. In
other words, family life and social life should not be strained by
working hours including overtime work, work during inconvenient
hours, business travel, transfers, vacations etc.
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• Social Relevance of Work: QWL is concerned about the
establishment of social relevance to work in a socially beneficial
manner. The workers’ self-esteem would be high if his work is useful
to the society and the vice versa is also true.
To summarize, Quality of Work Life is the degree to which employees of
an organization are able to satisfy their personal needs through
experience in the organization. It main aim is to create a work environment
where employees work in cooperation with each other and contribute to
organizational objectives.
Fig:18.1: Quality of Work Life
• Providing Job Security

Job security is a sense of knowing that your job is safe from being cut.
It's an assurance that you will be able to work in your current
employment for the foreseeable future. Job security comes with a
feeling of protection against things like layoffs, economic downfalls,
and other factors that could impact employment
• Job enrichment
Job enrichment is a strategy used to motivate employees by giving
them increased responsibility and variety in their jobs. The idea is to
allow employees to have more control over their work. By doing so,
one can tap into their natural desire to do a good job and contribute to
the overall goals of the company.
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• Career growth plans
Quite simply, a career development plan (CDP) is a list of long and short-
term goals that employees set for themselves in either their current role
or pre-emptively for their future jobs. It includes a variety of experiences
that employees must have to achieve the goals they have set for
themselves.
• Open communication
Open communication occurs when the sender and receiver share all the
necessary information for both of them to complete their assigned tasks.
There are no hidden agenda or misrepresentation of information. Open
communication is facilitated by effective communication.
• Increased employee participation
Employee participation is a process in which employees take control of
their work and its conditions by incorporating their involvement in
decisions regarding their work (Strauss, 2006). In this process,
employees share decision-making power regarding their tasks with their
superiors.
• Flexible work timings
Flextime is a work arrangement in which employees can choose the

starting and finishing times of their workday. Flextime employees are
typically required to work during their employer's core hours. Flextime
work arrangements are popular because they help employees achieve a
positive work-life balance.
• Reward and Recognition
Rewards and recognition refer to the acknowledgement of the good work
of an employee and potential perks.
18.2 ISSUES IN QUALITY OF WORKING LIFE
The major factors that affect the quality of work life be started thus:
18.2.1. Pay: QWL is basically built around the concept of equitable pay.
In the days ahead, employees may want to participate in the profits of the
firm as well. Employees must be paid their due share in the progress and
prosperity of the firm.
18.2.2. Benefits: Workers throughout the globe have raised their
expectations over the years and now feel entitled to benefits that were
once considered a part of the bargaining process. Apart from safe and
healthy working conditions, they would love to have benefits of all kinds
from the employer(s).
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18.2.3. Job Security: Employees want stability of employment. They so
not like to be the victims of whimsical personnel policies and stay at the
mercy of employers. The workplace should offer security of employment
and the question of layoffs is opposed tooth and nail by all categories of
employees these days.
18.2.4. Alternative work schedules: Employees demand more freedom
at the workplace, especially in scheduling their work.
18.3 ENHANCING QUALITY OF WORK LIFE
a) Flexi time: A system of flexible working hours.
b) Staggered hours: Here groups of employees begin and end work
at different intervals.
c) Compressed workweek: It involves more hours of work per day
for fewer days, per week.
d) Job enrichment: It attempts to increase a person’s level of output
by providing that person with exciting, interesting, stimulating or
challenging work. Such work, in turn, gives a person a chance to
satisfy higher level needs and is therefore a motivational influence.
e) Autonomous work groups (AWG): Here a group of workers will
be given some control of decision-making on production methods,
distribution of tasks, recruitment of team members, selection of
team leaders, work schedules and so on. Here the work group is
given responsibility for a task area without day-to-day supervision
and with authority to influence and control both group members
and their behaviours.
f) Occupational Stress: Occupational mental-health programmes
dealing with stress are beginning to emerge as a new and
important aspect of QWL programmes in recent years. Obviously,
an individual suffering from an uncomfortable amount of job-
related stress cannot enjoy a high quality of work life. To this end,
the Personnel managers have to look into the working conditions,
nature of work, worker’s abilities, etc. To reduce job- related
stress, the organisation must ensure the best fit between
employee capabilities and organisational requirements and
thereby ensure continued development of people at all levels.
g) Worker participation: Employees have a genuine hunger for
participation in organisational issues affecting their lives. Naturally,
they demand far more participation in the decision-making process
at the workplace. They want more democratic employer-employee
relationships. Personnel managers, therefore, must be sensitive to
the internal sound and sights of the corporate citizens who are
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voluntary members of the organisation and provide for a less
autocratic and more participative style of leadership.
h) Social Integration: According to Prof. Walton, the work
environment should provide opportunities for preserving an
employee’s personal identity and self- esteem through freedom
from prejudice, a sense of community, interpersonal openness
and the absence of stratification in the organisation. There should
be equal treatment in the workplace.
i) Work and total life space: A person’s work should not
overbalance his life. Ideally speaking, work schedules, career
demands and other job requirements should not eat too much into
a person’s leisure time and family life.
18.4 OBSTACLES IN QWL
a) job satisfaction
The term "job satisfaction" refers to how satisfied an employee is at his/her
organization. Factors such as working environment, people at work, job
security, and work responsibilities majorly impact an individual's job
dissatisfaction levels.
With better job satisfaction comes an improved quality of work life. An

employee who is satisfied with his position at the company is more likely
to do good work. Consequently, job dissatisfaction is more likely to lower
employee engagement as well as higher turnover rates.
b) Workplace Stress
Stress is a silent killer. This is especially true for most working individuals.
With the added pressure to manage their work-life, employees feel
extreme levels of stress. Not only does it impact their physical health, but
it affects their emotional wellbeing as well.
According to stress.org, workplace stress is a result of the following
factors:
• Workload contributes to the primary reason for stress at almost
46%
• People Issues comes second at 28%
• Work-life balance (20%)
• Lack of job security (6%)
The good news is that with proper organizational commitment and
personal effort, stress can be effectively handled.
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c) Financial Reimbursement
The purpose behind any work is to get a substantial income in return.
Rewards, pay, and benefits enhance organizational QWL. With better
compensation, employees are more involved in their work. Unless the
company provides extrinsic motivation (in the form of better financial gain),
workers will less likely go beyond the job requirements. After obtaining
good pay, employees are more likely to find job satisfaction as well as
more committed to achieving the company's goals.
d) Working Conditions / Job Environment
Businesses need to understand the value of a pleasant working
environment for enhanced organizational effectiveness. The job
environment affects life at work, mood, performance, and motivation.
Improved Quality of Lighting Good lighting makes a drastic difference in
employees' performance and attitude. Research states that exposure to
natural light helps in improving energy, mood, focus, and productivity.
A great alternative to natural lighting is blue-enriched light bulbs. Using

such lighting will promote calmness and positivity in the workplace.
e) Comfortable Working Environment
Make an effort to provide relaxing working conditions by providing comfy

chairs, indoor plants, break rooms, and office snacks. Make the workplace
an enjoyable and fun place to be.
f) Respect and Fairness
Unless an employee is being treated fairly and with respect, he/she is less
likely to feel any connection to the place of work. This implies that every
employee deserves to feel belonged regardless of their race, gender,
sexuality, or job role.
18.5 QUALITY CIRCLES
Quality circle is a people building philosophy based on the premise that
an employee doing a particular job is biggest expert of that field and thus
is in a better position to identify, analyse and resolve the work-related
problems through their innovative and unique ideas.
Quality circle is a small group of employees in the same work area or
doing similar type of work who voluntarily meets regularly for about an
hour every week to identify, analyse and resolve work related problems.
The objective is to improve quality, productivity and the total performance
of the organisation and also to enrich the quality of work life of employees.
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is in a better position to identify, analyse and resolve the work-related
problems through their innovative and unique ideas.
In fact, it is a practical application of McGregor’s Theory ‘Y’ that if given
the right environment and decision-making power, people will enjoy and
take pride in their work thus leading to enrichment of their work life.
is in a better position to identify, analyse and resolve the work related
problems through their innovative and unique ideas. In fact, it is a practical
application of McGregor’s Theory ‘Y’ that if given the right environment
and decision-making power, people will enjoy and take pride in their work
thus leading to enrichment of their work life.
By solving their work-related problems, the employees reduce the
rejection rate, rework and thus their mental tensions are reduced, enabling
them to work with total commitment and dedication.
It is a voluntary group of employees, who are doing the same or similar
type of job, meet together on a regular’ basis to identify, analyse and solve
their work-related problems leading to improvement in their work,
performance and- enrichment of their work life. The number of circle
members could vary from 5 to 15 but the ideal size of a circle is 7 or 8
members. The number of members should be such that the circle is
effective.
The size should not be so high that every member cannot have sufficient
time and opportunity to participate and contribute. The quality circle
members must be from the same work area so that the problems they
identify will be familiar to all the members for effective participation.
It is a small group of employees in the same work area or doing similar
type of work who voluntarily meet regularly for about an hour every week
to identify, analyse and resolve work- related problems not only to improve
quality, productivity and the total performance of the organisation, but also
to enrich the quality of work life of employees. There is a misconception
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that quality circles and task force are one and the same. But a quality
circle is not task force and the former is broader than the latter.
A task force is a group of most skilled employees selected and appointed
by management, engaged in various functions with an orientation to
problem-solving. The quality circles are voluntary associations of workers
of the same workplace. Quality circles involve people in solving problems
and tap their brain power effectively.
A task force is appointed by the management for problem solving whereas
quality circle is a voluntary association of workers of the same workplace.
While quality circle is formed to improve quality of products/services,
productivity and reduce cost of production, it also satisfies the
psychological need for self-esteem and recognition of the workers.
Members of the quality circle jointly discuss and identify the problem,
analyse them thoroughly and recommend solutions.
Fig 18.2: Structure of Quality Circle

Effective Quality Circles includes
1. The atmosphere should be informal, comfortable and relaxed
2. The members should feel involved and interested.
3. Everyone should participate.
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4. The objectives should be clear to the members.
5. The members should listen to each other.
6. The group should feel comfortable even when there are
disagreements.
7. The decisions should generally be taken by a kind of consensus
and Voting should be minimum.
8. When an action is required to be taken, clear assignments should
be made and accepted by all the members.
9. The leader should not dominate the group. The main idea should
not be as to who controls but how to get the job done.
10. Until a final solution is found and results are attained feedback is
Necessary.
18.6 SET UP OF QUALITY CIRCLE
1. Non-members are the persons who help in implementing the
recommendations made by the quality circle members.
2. Members are the main players in the programme, and they

participate in the meetings, express their ideas and develop
solutions to the problem.
3. Leader is elected by the members and the line manager may act
as the leader of the quality circle.
4. Facilitator is a link between the quality circle leader and the
steering committee, and his duties include co-ordination, training
of members, initiating forming of quality circle, provide feedback to
steering committee and act as an evaluator.
5. Steering committee, the apex body operating at plant level,
responsible for formulating objectives and providing resources to
quality circle members.
6. Top Management, the decision-making body, consisting of chief
executive officer, general managers and other senior managers
provides support and encouragement to quality circles.
The quality circles owe their origin to Dr. Kaoru Ishikawa, a Japanese
Scientist, who conceptualized and implemented quality circles for
improving productivity in Japan. The Japanese realized that the
involvement of their employees at the gross roots level would give the
necessary fillip to achieve better quality standards. A massive training
programme was organised for workers, foremen and supervisors, to
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improve the quality of work as well as to improve the productivity of the
organisation.
The Second World War devastated all industries and Japaneses had to
build up their economy from the scratch. To improve the image of the
nation, Gen. Douglas McArthur, in command of the allied forces in Japan
at that time, requested the United States Government to send
management experts to help the Japanese rejuvenate their industries.
An eminent expert on Statistical Quality Control Techniques of the United
States, Dr. Edward Deming, was sent to Japan from 1948-1950 to train
the Japanese management personnel. Then during 1954-55, another
famous management consultant, Dr. Juran visited Japan to lecture on
‘Quality Management’. He preached that quality begins at the stage of
designing and ends after satisfactory services to the customers. ‘Total
Quality’ becomes more important for the success of any organisation
rather than quality during the stage of only manufacture.
The Japanese Government was deeply satisfied with the achievements

of Dr. Deming and Dr. Juran and it followed various programmes on
Quality Control, statistics and other related subjects. The image of
Japanese industries improved with these programmes. The Quality Circle
movement started gathering momentum. Many people were involved, and
most of them were supportive to the movement. The nation strived to
improve its quality image and productivity.
Thus, the concept of quality circles was evolved and adopted in Japan in
the early 1960s as a result of compulsion of circumstances at that time.
Much of the success of the Japanese industry can be traced to the efforts
of Japanese Union of Scientists and Engineers (JUSE).
The concept of quality circles has emerged from quality control. Quality
circles are quite popular in Japan and U.S.A. India also attempted to
implement quality circles in many of its organisations. Quality circles
involve people in solving problems and tap their brainpower effectively.
People and their brains are the most precious resources for any
organisation.
Every business organisation wants to improve their productivity, but not
at the cost of their people, rather at the expense of wasted time,
unnecessary work and products of poor quality. Quality circles involve
minds and hands of the people who work for the organisation.
People working in the production floor can cut the wastages because only
they know their jobs well, better than anyone else. They will use more of
their untapped brainpower, if they see working cooperatively can improve
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communication and quality, cut the wastages and eventually give more
job satisfaction and enjoyment.
18.7 CHARACTERISTICS OF QUALITY CIRCLE
The quality circle thus has the following characteristics:
1. A small group of people who do similar work
The quality circle essentially consists of people who do similar work. But
it does not imply that the circle cannot consult the specialists or others. In
fact, ideas and solutions can be sought from any corner.
2. The members in the circle should not be many
It is argued that smaller the circle better the coordination and

homogeneity. The circle should look like a team and not a committee. It
should consist of members between three and ten depending upon the
size of the department. As suggestions for removing any snag or
improving the productivity are invited from every member of the
department no one would feel neglected, or side tracked.
3. Voluntarily meeting together

People are invited to join the quality circle, but they are not compelled.
The members feel the need to meet together to discuss and devise ways
to improve the functioning of their areas concerned. Hence, joining a
quality circle is voluntary and not forced upon.
4. Meeting regularly every week
The duration and frequency of meetings even vary in Japan (where this
concept originated), it is favoured to have meetings at least an hour every
week. But actually, the frequency and duration of each meeting should be
decided by the circle members who will take all factors into account such
as the severity of the problem, urgency of problem, number of problems
etc. The date of holding a meeting is also decided by the circle members
so that their meeting does not disturb the production schedule.
In practice, the quality circles have proved to be a boon in disguise for the
industries. They may hold the meetings during a maintenance period, a
job changes over or after completion of weekly work schedule. They may
meet at the beginning or end of the shift or during lunch break.
5. Under the leadership of their own supervisor
The quality circle is purely concerned with work-related problems.
Therefore, supervisors of the work area prove to be the best persons to
lead the group, as they are thorough with the functioning of the
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department. The idea of electing or selecting the leader from the quality
circle members is not encouraged as it does not work out effectively.
6. Identification, Analysis and Solutions
The circle identifies their own problems in their own work area. The circle
members are not encouraged to highlight the fault of others.
7. Presenting Solutions to Management
After collection of data, working out new ideas in consultation with all kinds
of people, the members come to a conclusion which if implemented will
deliver the goods. The final idea (solution) should be presented to the
management together by the group members (not by the leader alone or
any other member). Interestingly the circle solutions (projects) are so
meticulously thought out that their outright rejection (not favoured for
implementation) by the management is rare.
8. Self-Implementation
The quality circles are made for implementation of their solutions as they
deal with the problems over the fence in the next department are
completely isolated from it. Only each department has to care for their
babies.
9. Meeting time any time

The meetings of the circle members may not be arranged essentially
during their normal working hours. As it may affect their working and
thereby production. Also, if the work is done in shifts then the circle
members may come different shifts and a common free time for all may
be difficult to spare within normal working period. Hence, such meetings
could be held any time in a working day and holiday.
18.8 ADVANTAGES OF QUALITY CIRCLES
The following are some of the advantages of Quality Circle.
1) It infuses team spirit among the workers.
2) It improves decision making ability.
3) It improves employee communication at all levels of the
organization.
4) It improves problem solving ability.
5) It improves leadership skill.
6) It builds confidence / trust.
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LET US SUM UP
In this unit, you have learnt about Quality of work life which is a generic
phrase that covers a person's feelings about every dimension of work
including economic rewards and benefits, security, working conditions,
organizational and interpersonal relationships, and its intrinsic meaning in
a person's life. The concept of quality of working life thus includes
emphasis on extrinsic and intrinsic job factors and other aspects like
individual power, employee participation in the management process,
fairness and equity, social support, use of one's present skills, self-
development, a meaningful future at work and social. Quality of work
(accuracy, thoroughness, competence) Quantity of work (productivity
level, time management, ability to meet deadlines) Job knowledge (skills
and understanding of the work) Working relationships (ability to work with
others, communication skills)
CHECK YOUR PROGRESS

1. QWL movement was spearheaded by
a) C.A. Barlett and S. Ghoshal
b) Eric Tryst, Fred Enery, Eina Thorsrud
c) D. Harnett and L. Cummings
d) Ronen Simcha and Oded Shankar
2. Which one is not a part of effective organization’s career planning
process?
a) Assessment of Occupational and career choice
b) Personal Assessment
c) Annual Appraisal and Development Programme
d) Incentive Management
3.________ involves conscious efforts to organise tasks, duties and
responsibilities into a unit of work to achieve certain objectives.
a) Training needs analysis
b) Job design
c) Job analysis
4. Which are the factors by which the process of job design can be
affected?
a) Organisational
b) Environmental
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c) Behavioural
d) All of the above
5. Which method is used for evaluating the performance of executives
or supervisory positions?
a) Psychological Appraisal
b) Assessment Centre
c) Behaviourally Anchored Rating Scale
d) 360-degree feedback
GLOSSARY
Quality Circle : A quality circle is a participatory management

technique that enlists the help of employees in
solving problems related to their own jobs.
Financial : Reimbursement is when a business pays back

Reimbursement an employee, client, or other people for money
they spent out of their pocket or for overpaid
money
SUGGESTED READINGS
1. Rao, V S P (2014), Human resource Management Text and
Cases, latest Edition, Excel Books, India
2. Robert L Mathis, John H Jackson, Manas Ranjan Tripathy (2012),
Human Resource Management- A South Asian Perspective, latest
Edition, Cengage Learning, India
3. Seema Sanghi, (2012) Human Resource Management, latest
4. Shyamkant Gokhale (2012), Personal Management, latest Edition,
WEB RESOURCES
1. https://www.economicsdiscussion.net/human-resource-
management/quality-circle/quality-circle/32204
2. https://www.businessmanagementideas.com/management/qualit
y-circles/quality-circles-q-c-meaning-objectives-and-
benefits/6302
3. Quality of Work Life - YouTube
4. Quality of work life, Quality of working life, QWL, Objectives of
QWL, Nature and Scope of QWL,GTU - YouTube
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1.b) 2.d) 3.c) 4.d) 5. b)
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UNIT 19
MANAGEMENT BY OBJECTIVES
STRUCTURE
Overview
Learning Objectives
19.1 Management by Objectives
19.2 Advantages and Disadvantages of Management by
Objectives
19.3 Steps in Management by Objectives Process
19.4 Benefits of Management by Objectives
19.5 Limitations of Management by Objectives

19.6 Talent Management
19.7 The importance of Talent Management
19.8 Competency Mapping
19.9 Building Competency Models
19.10 Methods of Competency Mapping
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
In this unit, you will learn about the Management by objectives (also
known as management by planning) which is the establishment of a
management information system (MIS) to compare actual performance
and achievements to the defined objectives. Practitioners claim that the
major benefits of MBO are that it improves employee motivation and
commitment and allows for better communication between management
and employees.
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LEARNING OBJECTIVES
• explain the objectives of Management By Objectives
• discuss the advantages and disadvantages of MBO
• assess the process of Talent Management
• bring out the effectiveness of competency mapping
19.1 MANAGEMENT BY OBJECTIVES
Management by Objectives (MBO) is a personnel management technique
where managers and employees work together to set, record and monitor
goals for a specific period of time. Organizational goals and planning flow
top-down through the organization and are translated into personal goals
for organizational members. The technique was first championed by
management expert Peter Drucker and became commonly used in the
1960s.
Management by objectives (MBO) is a strategic management model that
aims to improve the performance of an organization by clearly defining
objectives that are agreed to by both management and employees.
According to the theory, having a say in goal setting and action plans
encourages participation and commitment among employees, as well as
aligning objectives across the organization.
However, a cited weakness of MBO is that it unduly emphasizes the
setting of goals to attain objectives, rather than working on a systematic
plan to do so. Critics of MBO, such as W. Edwards Demming, argue that
setting particular goals like production targets leads workers to meet those
targets by any means necessary, including short-cuts that result in poor
quality.
19.2 ADVANTAGES AND DISADVANTAGES OF MANAGEMENT BY
OBJECTIVES
MBO comes with many advantages and disadvantages to a company's
success. The benefits include employees taking pride in their work with
goals that they know they can achieve. It also aligns employees with their
strengths, skills, and educational experiences. MBO also leads to
increased communication between management and employees.
Assigning tailored goals brings a sense of importance to employees,
bringing loyalty to the firm. And lastly, management can create goals that
lead to the success of the company.
Though there are plenty of benefits to MBO, there are some drawbacks
and limitations. As MBO is focused on goals and targets, it often ignores
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other parts of a company, such as the culture of conduct, a healthy work
ethos, and areas for involvement and contribution. MBO puts increased
strain on employees to meet the goals in a specified time frame. In
addition, if management solely relies on MBO for all management
responsibilities, it can be problematic for areas that don't fit under MBO.
Management by objectives (MBO) is a strategic management model that
aims to improve the performance of an organization by clearly defining
objectives that are agreed to by both management and employees.
According to the theory, having a say in goal setting and action plans
encourages participation and commitment among employees, as well as
aligning objectives across the organization.
An important step in the MBO approach is the monitoring and evaluation
of the performance and progress of each employee against the
established objectives. Ideally, if the employees themselves are involved
in setting goals and deciding their course of action, they are more likely to
fulfill their obligations.
19.3. STEPS IN MANAGEMENT BY OBJECTIVES PROCESS
1. Define organization goals
Setting objectives is not only critical to the success of any company, but it
also serves a variety of purposes. It needs to include several different
types of managers in setting goals. The objectives set by the supervisors
are provisional, based on an interpretation and evaluation of what the
company can and should achieve within a specified time.
2. Define employee objectives
Once the employees are briefed about the general objectives, plan, and
the strategies to follow, the managers can start working with their
subordinates on establishing their personal objectives. This will be a one-
on-one discussion where the subordinates will let the managers know
about their targets and which goals they can accomplish within a specific
time and with what resources. They can then share some tentative
thoughts about which goals the organization or department can find
feasible.
3. Continuous monitoring performance and progress
Though the management by objectives approach is necessary for
increasing the effectiveness of managers, it is equally essential for
monitoring the performance and progress of each employee in the
organization.
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4. Performance evaluation
Within the MBO framework, the performance review is achieved by the
participation of the managers concerned.
5. Providing feedback
In the management by objectives approach, the most essential step is
continuous feedback on the results and objectives, as it enables the
employees to track and make corrections to their actions. The ongoing
feedback is complemented by frequent formal evaluation meetings in
which superiors and subordinates may discuss progress towards
objectives, leading to more feedback.
6. Performance appraisal
Performance reviews are a routine review of the success of employees
within MBO organizations.
Management by objectives outlines five steps that organizations should
use to put the management technique into practice.
The first step is to either determine or revise organizational objectives for

the entire company. This broad overview should be derived from the firm's
mission and vision.
The second step is to translate the organizational objectives to

employees. In 1981, George T. Doran used the acronym SMART
(specific, measurable, acceptable, realistic, time-bound) to express the
concept.
Step three is stimulating the participation of employees in setting
individual objectives. After the organization's objectives are shared with
employees, from the top to the bottom, employees should be encouraged
to help set their own objectives to achieve these larger organizational
objectives. This gives employees greater motivation since they have
greater empowerment.
Step four involves monitoring the progress of employees. In step two, a
key component of the objectives was that they are measurable for
employees and managers to determine how well they are met.
The fifth step is to evaluate and reward employee progress. This step
includes honest feedback on what was achieved and not achieved for
each employee.
Management by Objectives (MBO) in Practice
Management by objectives outlines five steps that organizations should
use to put the management technique into practice.
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• The first step is to either determine or revise organizational
objectives for the entire company. This broad overview should be
derived from the firm's mission and vision.
• The second step is to translate the organizational objectives to
employees. Drucker used the acronym SMART (specific,
measurable, acceptable, realistic, time-bound) to express the
concept.
• Step three is stimulating the participation of employees in setting
individual objectives. After the organization's objectives are
shared with employees, from the top to the bottom, employees
should be encouraged to help set their own objectives to achieve
these larger organizational objectives. This gives employees
greater motivation since they have greater empowerment.
• Step four involves monitoring the progress of employees. In step
two, a key component of the objectives was that they are
measurable in order for employees and managers to determine
how well they are met.
• The fifth step is to evaluate and reward employee progress. This
step includes honest feedback on what was achieved and not
achieved for each employee.
19.4. BENEFITS OF MANAGEMENT BY OBJECTIVES
Management by objectives helps employees appreciate their on-the-job
roles and responsibilities.
The Key Result Areas (KRAs) planned are specific to each employee,
depending on their interest, educational qualification, and specialization.
The MBO approach usually results in better teamwork and
communication.
It provides the employees with a clear understanding of what is expected
of them. The supervisors set goals for every member of the team, and
every employee is provided with a list of unique tasks.
Every employee is assigned unique goals. Hence, each employee feels

indispensable to the organization and eventually develops a sense of
loyalty to the organization.
Managers help ensure that subordinates’ goals are related to the
objectives of the organization.
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19.5. LIMITATIONS OF MANAGEMENT BY OBJECTIVES
Management by objectives often ignores the organization’s existing ethos
and working conditions.
More emphasis is given to goals and targets. The managers put constant
pressure on the employees to accomplish their goals and forget about the
use of MBO for involvement, willingness to contribute, and growth of
management.
The managers sometimes over-emphasize the target setting, as
compared to operational issues, as a generator of success.
The MBO approach does not emphasize the significance of the context
wherein the goals are set. The context encompasses everything from
resource availability and efficiency to relative buy-in from the leadership
and stakeholders.
Finally, there is a tendency for many managers to see management by
objectives as a total system that can handle all management issues once
installed. Overdependence may impose problems on the MBO system
that it is not prepared to tackle, and that frustrates any potentially positive
effects on the issues it is supposed to deal with.
19.6 TALENT MANAGEMENT

Talent management naturally encompasses many of the responsibilities
of HR.
Talent management is the science of using strategic human resource
planning to improve business value and to make it possible for companies
and organizations to reach their goals. Everything done to recruit, retain,
develop, reward and make people perform forms a part of talent
management as well as strategic workforce planning.
All the same, it is not enough to expect that just because you have an HR
department, you are managing talent. need to have a talent management
strategy in place designed just for your company to gain optimal results.
19.7 THE IMPORTANCE OF TALENT MANAGEMENT
The simple answer is because it capitalizes on employees — arguably,

the most important asset of your company. Talent management helps you
maximize the value of employees. There are a few main reasons why this
is the case.
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1. It helps businesses improve performance with top specialists in
your organization, you can reach any goal.
Talent management is most effective of all when it combines three key
components: rapid talent allocation, positive employee experience, and a
strategic HR team.
2. It allows companies to stay competitive
By hiring and developing talented employees, your organization becomes
stronger and better prepared to face changes and risks.
3. It drives innovation
New technologies are always hitting the scene, whatever your industry.
Talented employees are able to find ways to harness the capabilities of
new tools and solve problems or come up with original ideas.
4. It helps form productive teams
The appropriate talent management strategy will allow you to form a more
productive team. This is far more useful than just having a bunch of
creative and talented people in your organization.
5. It decreases turnover
When employees feel valued at a company, when they know they will
have plenty of opportunities to grow in the business, they are less likely to
seek work elsewhere.
6. It leads to strong employer branding
Talent management brands your company as an employer. This helps
you to attract the best candidates for future hires.
7. It motivates others to grow
Having inspiring talent on your team will motivate other employees and
help them grow.
Whereas there is no standardized model for talent management, some
HR professionals have proposed excellent models that any company can
use.
However, if you choose to develop your model, it must include the
following.
1. Planning
Planning aligns your talent management model in line with the overall
goals of your organization.
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Only with the correct planning can you ensure that you seek talent with
the right skills and experience. In addition, it assesses current employees
to see what is working well for the company.
For instance, if employees with certain characteristics tend to stay at the
organization for longer, you should plan to hire more workers like them.
2. Attracting
It is not always as simple as when one person leaves the company, you
start a search for someone else to fill the role.
For instance, your needs may change, or employees may take on new
responsibilities. Talent management ensures that you always have
sufficient staff to carry out all your operations and prevent heavy
workloads that could cause demotivation.
The right strategy will attract just the kind of workers you want at your
business. Such hires will be driven, skilled, and seeking to advance within
the company.
Attracting talent is all about branding your company as an employer. You’ll

need to find ways to increase visibility in ways that allow you to present
the company as the best place to work. The main consideration here is to
make your business more approachable.
Even if you choose not to hire someone for a particular position, you still
need to create a positive experience. This will give you the opportunity to
hire these candidates for other jobs or use them as ambassadors to
acquire other talent.
3. Developing
The development part of the model involves taking steps to help talent
grow within the company.
It should be aligned with the employee development plan and includes
identifying roles where particular employees could move to in the future
as well as considering how to expand workers’ skills and knowledge to
fulfill new challenges facing your organization.
Talent management also looks at what will keep employees at your

company enthusiastic and willing to go the extra mile. It is necessary to
provide employees with value.
Motivation also requires the correct onboarding to give new hires a great
impression of your company from the very beginning. This will increase
the chance that they will stay with the company and work hard.
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4. Retaining
Another purpose of talent management is to keep people at your company
for longer.
Employees need to continue feeling that the company is an enjoyable,
meaningful place to work.
Through training and other types of engagement, employees have the
chance to create a career without leaving the company. You may achieve
this by focusing on compensation (monetary and otherwise) as well as
company culture.
5. Transitioning
After hiring and developing their skills, you need to plan for employees’
transitions
Talent management is the full scope of HR processes to attract, develop,
motivate and retain high-performing employees.
This definition has three components

The full scope of HR processes: Talent management is about a set of
HR processes that integrate with each other. This means that talent
management activities are larger than the sum of the individual parts. This
also means that a talent management strategy is required to capitalize on
its full potential. More about this later.
Attract, develop, motivate and retain: This is not a comprehensive list.
Talent management touches on all key HR areas, from hiring to employee
onboarding and from performance management to retention.
High-performing employees: The purpose of talent management is to
increase performance. It aims to motivate, engage, and retain employees
to make them perform better. This is why the importance of talent
management is so significant. When it’s done right, companies can build
a sustainable competitive advantage and outperform their competition
through an integrated system of talent management practices that are
hard to copy and/or imitate.
In other words, talent management is a process aimed at driving
performance through integrated people management practices. As such,
it’s one of the key functions of Human Resources.
Definition: Talent management is the systematic process of identifying
the vacant position, hiring the suitable person, developing the skills and
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expertise of the person to match the position and retaining him to achieve
long-term business objectives.
Talent management is defined as the methodically organized, strategic
process of getting the right talent onboard and helping them grow to their
optimal capabilities keeping organizational objectives in mind.
The process thus involves identifying talent gaps and vacant positions,
sourcing for and on boarding the suitable candidates, growing them within
the system and developing needed skills, training for expertise with a
future-focus and effectively engaging, retaining and motivating them to
achieve long-term business goals. The definition brings to light the
overarching nature of talent management – how it permeates all aspects
pertaining to the human resources at work while ensuring that the
organization attains its objectives. It is thus the process of getting the right
people onboard and enabling them to enable the business at large.
Fig.19.1 Talent Management Process Model

Planning: Planning is the initial step in the process of Talent
Management. It involves the following:
• Identifying the human capital requirement.
• Developing the job description and key roles.
• Proposing a workforce plan for recruitment.
Attracting: Deciding whether the source of recruitment should be internal
or external and seeking for the suitable individuals to fill in the vacant
positions through:
• Job Portals such as Naukri.com, Timesjob.com, etc.
• Social Network such as LinkedIn and Twitter.
• Referrals.
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Selecting: Recruiting and selecting the personnel. It involves the
following steps:
• Scheduling written test and interviews.
• Scrutinizing the most suitable candidate for the profile.
Development: In this stage, the employee is prepared according to and
for the organization and the profile. Following are the steps involved in the
process:
• Carrying out an on boarding programme or an orientation
programme.
• Enhancing the skills, aptitude and proficiency of the personnel to

match the profile.
• Counseling, guiding, coaching, educating, mentoring employees
and job rotation.
Retaining: Employee retention is essential for any organizational
existence and survival. Following are the ways of employee retention:
• Promotions and increments.

• Providing opportunities for growth by handing over special
projects.
• Participative decision making.

• Teaching new job skills.
• Identifying the individual’s contribution and efforts.
Transitioning: Talent management aims at the overall transformation of
the employees to achieve the organizational vision. It can be done
through:
• Retirement benefits to employees.
• Conducting Exit interviews.
• Succession Planning or Internal Promotions.
19.8 COMPETENCY MAPPING

Competency Mapping is defined as the process of identifying the key
competencies, which have the ability to do something efficiently & achieve
the goals of the organization & make the organization successful.
Competency is defined as a skill/quality that helps the organization in job
evaluation, training and recruitment.
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19.9 BUILDING COMPETENCY MODELS
For building competency models, there are three ways in which the
models may be developed:
Behavioural Indicators: By behavioural indicators, it describes the
behaviours, thought patterns, abilities and traits that contribute to superior
performance.
Evaluation of Competency Levels: For building the competency model,
it is very much required to set exceptional competencies of high
performers as standards for evaluating competency levels of employees.
Competencies Describing Job Requirements: When the organizations
are having multiple competency models, this approach is useful. The
competencies required in a particular job are described and job specific
competency models help in structuring focused appraisal and
compensation decisions.
Competency Mapping is a process of identifying key competencies for a
company or institution and the jobs and functions within it. Competency
mapping is important and is an essential exercise.
Every well managed firm should – have well defined roles and list of
competencies required to perform each role effectively. Such list should
be used for recruitment, performance management, promotions,
placement and training needs identification.
Many competency mapping models break down strengths in to two major
areas- functional and behavioural. Functional skills include practical
knowledge that a person needs to perform a job. For e.g. functional
requirements for a secretary might include familiarity with computer
systems and office machinery as well as bookkeeping knowledge. These
skills are generally easy to measure through skill tests and can define
whether a worker is capable of carrying out his or her responsibilities.
Competency Mapping is a process of identifying key competencies for a
company or institution and the jobs and functions within it. Competency
mapping is important and is an essential exercise. Every well managed
firm should – have well defined roles and list of competencies required to
perform each role effectively. Such list should be used for recruitment,
performance management, promotions, placement and training needs
identification.
The competency framework serves as the bedrock for all HR applications.
As a result, or competency mapping, all the HR processes like talent
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induction, management development, appraisals and training yield much
better results.
Behavioral assessment is more difficult to quantify and is the focus of most
competency studies. It examines personal skills such as leadership,
active listening, teamwork and morale. This type of testing is important for
getting a complete picture of an individual’s skill set.
The use of Competencies can include assessment during recruitment
through specific work-based exercises and relevant, validated,
psychometric tests; assessment of further development; as a profile
during assessment to guide future development needs; succession
planning and promotion; organisational development analysis.
Techniques used to map Competencies include Critical Incident Analysis
and Repertory Grid.
Competency mapping is an approach that has the objective of helping an
organization align individual development with the strategic objectives of
the company.
The term ‘competency mapping’ has gained a wider circulation and
importance among academicians and businesses in recent times. In a
competitive business scenario, organizations have felt the utmost need
for procuring and retaining competent employees and developing distinct
competencies. Most of the jobs contain some critical elements or parts.
To perform or fulfill these parts, it is important for the employees to have
special competencies. It is also natural that some people perform a
particular job more effectively than others. This difference exists because
a particular individual may have certain competencies that other
individuals might lack. This might help him/her to have an edge over the
other in a particular job.
An organization examines every job to ascertain the component parts and
the work environment in which it is performed. The process of examining
a job is termed job analysis. Job analysis com-prises two functions,
namely, job description and job specification. These are interrelated,
interactive, and interdependent. Job description comprises job orientation,
whereas job specification is oriented towards the jobholder.
In other words, job description is a broad statement, which consists of the
pur-pose, duties, and responsibilities of a job, all taken together. Job
specification, on the other hand, is also a broad statement, which specifies
only the qualities required for a job holder.
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According to Boyatzis (1982) “A capacity that exists in a person that
leads to behavior that meets the job demands within parameters of
organizational environment, and that, in turn brings about desired results”
The steps involved in competency mapping are presented below:
• Conduct a job analysis by asking incumbents to complete a
position information questionnaire (PIQ). This can be provided for
incumbents to complete or used as a basis for conducting one-on-
one interviews using the PIQ as a guide. The primary goal is to
gather from incumbents what they feel are the key behaviors
necessary to perform their respective jobs.
• Using the results of the job analysis, a competency-based job
description is developed. It is developed after carefully analyzing
the input from the represented group of incumbents and
converting it to standard competencies.
• With a competency-based job description, mapping the
competencies can be done. The competencies of the respective
job description become factors for assessment on the
performance evaluation. Using competencies will help to perform
more objective evaluations based on displayed or not displayed
behaviors.
• Taking the competency mapping one step further, one can use the
results of one’s evaluation to identify in what competencies
individuals need additional development or training. This will help
in focusing on training needs required to achieve the goals of the
position and company and help the employees develop toward the
ultimate success of the organization.
19.10 METHODS OF COMPETENCY MAPPING
Businesses use competency mapping to match the capabilities and talent
of personnel with specific job tasks and organizational needs. The
technique involves conducting a job analysis to identify core skills and
behaviors required to perform the role, drafting a job description based on
the key competencies and aligning resources to best fulfill competency
needs. Having a competency map makes it easier for firms to identify
qualified candidates, assess performance, focus training efforts and
enhance overall productivity. Common competency mapping approaches
include assessment center, critical incidents technique, interviewing,
questionnaires and psychometric tests.
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a) Assessment Centre: is a mechanism to identify the potential for
growth. It is a procedure (not location) that uses a variety of
techniques to evaluate employees for manpower purpose and
decisions. It was initiated by American Telephone and Telegraph
Company in 1960 for line personnel being considered for promotion
to supervisory positions. An essential feature of the assessment
center is the use of situational tests to observe specific job behavior.
Since it is with reference to a job, elements related to the job are
simulated through a variety of tests. The assessors observe the
behavior and make an independent evaluation of what they have
observed, which results in identifying strengths and weaknesses of
the attributes being studied.
b) Critical Incidents Technique: It is difficult to define critical incidents
except to say that it can contribute to the growth and decay of a
system. Perhaps one way to understand the concept would be to
examine what it does. Despite numerous variations in procedures for
gathering and analyzing critical incidents researchers and
practitioners agree the critical incidents technique can be described
as a set of procedures for systematically identifying behaviors that
contribute to success or failure of individuals or organizations in
specific situations. First of all, a list of good and bad on the job
behavior is prepared for each job. A few judges are asked to rate how
good and how bad is good and bad behavior, respectively. Based on
these ratings a checklist of good and bad behavior is prepared.
c) Interview Techniques Competency Mapping: Almost every
organization uses an interview in some shape or form, as part of
competency mapping. Enormous amounts of research have been
conducted into interviews and numerous books have been written on
the subject. There are, however, a few general guidelines, the
observation of which should aid the use of an interview for
competency mapping.
d) Questionnaires: Questionnaires are written lists of questions that
users fill out questionnaire and return. You begin by formulating
questions about your product based on the type of information you
want to know. The questionnaire sources below provide more
information on designing effective questions. This technique can be
used at any stage of development, depending on the questions that
are asked in the questionnaire. Often, questionnaires are used after
products are shipped to assess customer satisfaction with the
product. Such questionnaires often identify usability issues that
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should have been caught in-house before the product was released
to the market.
e) Psychometric Tests: Many organizations use some form of
psychometric assessment as a part of their selection process. For
some people this is a prospect about which there is a natural and
understandable wariness of the unknown.
A psychometric test is a standardized objective measure of a sample of
behavior. It is standardized because the procedure of administering the
test, the environment in which the test is taken, and the method of
calculating individual scores are uniformly applied. It is objective because
a good test measures the individual differences in an unbiased scientific
method without the interference of human factors. Most of these tests are
time bound and have a correct answer. A person’s score is calculated on
the basis of correct answers.
LET US SUM UP
In this unit, you have learnt about the MBO. Competency mapping is the
process of determining the skills, behaviors, abilities and knowledge a job
title requires. Competency mapping involves finding out the key skills and
behaviours which are required for a particular position in an organization.
It can be used for establishing the working culture of the organization,
strategies and goals of the organization and for benchmarking the goals
of the employees.
Talent management is how employers recruit and develop a workforce
that is as productive as possible and likely to stay with their organization
long term. When implemented strategically, this process can help improve
the overall performance of the business and ensure that it remains
competitive.
CHECK YOUR PROGRESS
1. Talent management is a process involves
a) attracting and retaining high-quality employees

b) developing their skills,
c) continuously motivating them to improve their performance.
d) All of the above
2. Talent Management is a _________________ Process
a) Constant Process
b) Planned Process
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c) Retrospective Process
3. The primary focus of Talent Management is to create
a) a support for organisation strategy
b) Satisfied Work force
c) Motivated Work Force
d) Matching model for organisation strategy
4. Talent Management focus to create a workforce who will
a) Compete with each other
b) Work beyond expectation
c) Gain knowledge
d) Stay in the organisation for the long run
5. You need to have a talent management strategy in place designed just
for your company
a) Attract Employees
b) gain optimal results
c) Gain Competitive advantage
d) Increase Morale
GLOSSARY
Psychometric : A psychometric test is any activity or

Tests assessment that is conducted in order to
evaluate a candidate performance and
includes, but is not limited to, skills,
knowledge, abilities, personality traits,
attitudes and job/academic potential.
Questionnaires : A questionnaire is a research tool featuring a

series of questions used to collect useful
information from respondents.
SUGGESTED READINGS
1. Indranil Mutsuddi, (2011), Essentials of Human Resource
Edition, HPH, India
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WEB RESOURCES
1. Management By Objective|MBO|Explanation -
Tamil|12th|Principles of Management| Strategy Sangamam|SKH -
YouTube
2. MBO | What is Management By Objective? | Advantages and
Disadvantages of MBO - YouTube
3. Lecture 23 : Management by Objectives - I - YouTube
4. 01 Management by Objectives - YouTube
1.d) 2.a) 3.c) 4.d) 5.b)
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UNIT 20
EMPLOYEE PARTICIPATION IN
MANAGEMENT
STRUCTURE
Overview
Learning Objectives
20.1 Joint Consultation and Employee Participation in
Management Collective Bargaining
20.2 Objectives of workers participation in management

20.3 Objectives of workers participation some common objectives
20.4 Definition of collective bargaining
20.5 Forms of Collective Bargaining
20.6 Employees Participation
20.7 Characteristics of Workers Participation
20.8 The objective of WPM, as envisaged in the Second Five Year

Plan of India is to ensure
20.8.1. Objectives of WPM in India
20.9 Levels of Participation
20.10 Benefits of Employee Participation
20.11 The success of worker’s participation in management is
limited due to the following factors
20.12 Workers’ Participation Management – Economic,
Psychological and Social Point of View
Let us sum up
Check your progress
Glossary
Suggested Readings
229
OVERVIEW
In this unit, you will learn about the Workers’ participation which is also
known as ‘labour participation’ or ‘employee participation’ in management.
In Germany it is known as co-determination while in Yugoslavia it is known
as self-management. The International Labour Organization has been
encouraging member nations to promote the scheme of Workers’
Participation in Management.
Workers’ participation in management implies mental and emotional
involvement of workers in the management of Enterprise. It is considered
as a mechanism where workers have a say in the decision-The philosophy
underlying workers’ participation stresses democratic participation in
decision-making; maximum employer-employee collaboration; minimum
state intervention; realization of a greater measure of social justice;
greater industrial efficiency; and higher level of organizational health and
effectiveness.
LEARNING OBJECTIVES
• discuss the objectives of workers participation
• explain the meaning and scope of collective bargaining
• bring out the effectiveness and forms of collective bargaining
20.1. JOINT CONSULTATION AND EMPLOYEE PARTICIPATION IN
MANAGEMENT COLLECTIVE BARGAINING
Workers’ participation in management is a process by which subordinate
employees, either individually or collectively, become involved in one or
more aspects of organizational decision making within the enterprises in
which they work.
Workers’ participation in management is an essential ingredient of
Industrial democracy. The concept of workers’ participation in
management is based on the Human Relations approach to Management
which brought about a new set of values to labour and management.
Traditionally the concept of Workers’ Participation in Management (WPM)
refers to participation of non-managerial employees in the decision-
making process of the organization.
It has been varyingly understood and practiced as a system of joint
consultation in industry; as a form of labor management cooperation; as
a recognition of the principle of co-partnership, and as an instrument of
industrial democracy. Consequently, participation has assumed different
forms, varying from mere voluntary sharing of information by management
230
with the workers to formal participation by the latter in the actual decision-
making process of management.
Article 43A of the Constitution of India deals with 'Participation of workers
in management of industries' and falls under Part IV - Directive Principles
of State Policy. The State shall take steps, by suitable legislation or in any
other way, to secure the participation of workers in the management of
undertakings, establishments or other organizations engaged in any
industry.
This was inserted in the Constitution (Forty-second Amendment) Act,
1976. The High-powered Expert Committee on Companies and MRTP
Acts headed by Justice Rajinder Sachar of the Delhi High Court has also
made certain recommendations about provisions to be made for workers'
participation in management of companies. Parliament may take early
steps to implement some of the recommendations made by the said
Committee. It is significant that there is no recommendation made even in
this Report about the right of trade unions to contest winding-up petitions.
If the workers are issued shares, then they would no doubt be entitled to
participate in the winding-up proceedings as contributors. This may be
one way of solving the problem by legislative means.
Definition
Behavioral terms, WPM means different things to different people
depending upon their objectives and expectations. Thus, WPM is an
elastic concept. For example, for management it is a joint consultation
prior to decision making, for workers it means co-determination, for trade
unions It is the harbinger of a new order of social relationship and a new
set of power equation within organizations, while for government it is an
association of labour with management without the final authority or
responsibility in decision making.
The concept of WPM is a broad and complex one. Depending on the
socio-political environment and cultural conditions, the scope and
contents of participation change.
International Institute of Labour Studies
WPM is the participation resulting from the practices which increase the
scope for employees’ share of influence in decision-making at different
tiers of organizational hierarchy with concomitant (related) assumption of
responsibility.
ILO: Workers’ participation, may broadly be taken to cover all terms of

association of workers and their representatives with the decision-making
231
process, ranging from exchange of information, consultations, decisions
and negotiations to more institutionalized forms such as the presence of
workers’ member on management or supervisory boards or even
management by workers themselves (as practiced in Yugoslavia).
20.2 OBJECTIVES OF WORKERS PARTICIPATION IN MANAGEMENT
The objectives of workers participation in management may vary from
country to country, state to state, and from industry to industry depending
upon the quality of manpower, level of technology, level of competition
socio-economic status, political philosophy, attitude of the working class
and the industrial relations scene. Though there are so many factors
governing the
20.3 OBJECTIVES OF WORKERS PARTICIPATION SOME COMMON
OBJECTIVES
• To prevent workers from exploitation by the management or by
the owners of the organisation
• To have democracy in the organization.

• To have proper development of the working class.
• To resolve conflicts and differences between management and
employees in a democratic manner.
• To create in employees a sense of participation in industry.
• To encourage suggestions from employees.
• To improve the working and living conditions of employees.
• To promote better understanding between labours and
management on the various issues of the organisations.
• To give employees a better understanding of their role in the
working of the industry.
• To give the employees an opportunity for self-expression leading
to industrial peace, good relations and increased co-operation.
20.4 DEFINITION OF COLLECTIVE BARGAINING
Industrial disputes between the employee and employer can also be
settled by discussion and negotiation between these two parties in order
to arrive at a decision.
According to Flippo, “Collective Bargaining is a process in which the
representatives of a labor organization and the representatives of
business organization meet and attempt to negotiate a contract or
232
agreement, which specifies the nature of employee-employer union
relationship”.
20.5 FORMS OF COLLECTIVE BARGAINING
The working of collective bargaining assumes various forms. In the first
place, bargaining may be between the single employer and the single
union, this is known as single plant bargaining. This form prevails in the
United States as well as in India.
Secondly, the bargaining may be between a single firm having several
plants and workers employed in all those plants. This form is called
multiple plants bargaining where workers bargain with the common
employer through different unions.
Thirdly, instead of a separate union bargaining with separate employer,
all the unions belonging to the same industry bargain through their
federation with the employer’s federation of that industry. This is known
as multiple employer bargaining which is possible both at the local and
regional levels. Instances in India of this industry-wide bargaining are
found in the textile industry.
20.6 EMPLOYEES PARTICIPATION
Employee’s participation in management refers to the participation of the

workers in the decision-making process of the organization. This has an
incredibly positive impact on the mental and psychological health of the
workers, and they are associated with the organization
Fig.20.1: Employee Involvement and employee participation
233
20.7 CHARACTERISTICS OF WORKERS PARTICIPATION
• Participation implies practices which increase the scope for
employees’ share of influence in decision-making process with the
assumption of responsibility.
• Participation presupposes willing acceptance of responsibility by
workers.
• Workers participate in management not as individuals but as a
group through their representatives.
• Worker’s participation in management differs from collective
bargaining in the sense that while the former is based on mutual
trust, information sharing and mutual problem solving; the latter is
essentially based on power play, pressure tactics, and
negotiations.
• The basic rationale tor worker’s participation in management is that

workers invest their Iabour and their fates to their place of work.
Thus, they contribute to the outcomes of organization. Hence, they
have a legitimate right to share in decision-making activities of
organisation.
20.8 THE OBJECTIVE OF WPM, AS ENVISAGED IN THE SECOND
FIVE YEAR PLAN OF INDIA IS TO ENSURE
i. Increase in productivity for the benefit of all concerned to an
enterprise, i.e., the employer, the employees and the community
at large.
ii. Satisfaction of worker’s urge for self-expression in the matters of
enterprise management.
iii. Making employees better understood of their roles in the
organisation. In ultimate sense, the objective of WPM in India is to
achieve organizational effectiveness and the satisfaction of the
employees.
20.8.1. Objectives of WPM in India are to
1. Promote mutual understanding between management and
workers, i.e., industrial harmony.
2. Establish and encourage good communication system at all levels.
3. Create and promote a sense of belongingness among workers.
4. Help handle resistance to change.
5. Induce a sense among workers to contribute their best for the
cause of organisation.
234
20.9 LEVELS OF PARTICIPATION
Having known the objectives of WPM, the question then is to what extent
workers can participate in decision-making process. In other words, it is
important to know the extents/levels of co-determination in an
organisation.
Viewed from this angle, Mehtras has suggested five levels of workers’
participation ranging from the minimum to the maximum. Since these
levels of workers’ influence the process and quality of decision making in
an organisation.
i. Informative Participation
This refers to management’s information sharing with workers on
such items those are concerned with workers. Balance Sheet,
production, economic conditions of the plant etc., are the
examples of such items. It is important to note that here workers
have no right of close scrutiny of the information provided and
management has its prerogative to make decisions on issues
concerned with workers.
ii. Consultative Participation
In this type of participation, workers are consulted in those matters

which relate to them. Here, the role of workers is restricted to give
their views only. However, the acceptance and non-acceptance of
these views depends on management. Nonetheless, it provides
an opportunity to the workers to express their views on matters
involving their interest.
iii. Associative Participation
Here, the role of the workers’ council is not just advisory unlike
consultative participation. In a way, this is an advanced and
improved form of consultative participation. Now, the management
is under a moral obligation to acknowledge, accept and implement
the unanimous decision of the council.
iv. Administrative Participation

In the administrative participation, decisions already taken are
implemented by the workers. Compared to the former three levels
of participation, the degree of sharing authority and responsibility
by the workers is definitely more in this participation.
235
v. Decisive Participation
Here, the decisions are taken jointly by the management and the
workers of an organisation. In fact, this is the ultimate level of
workers’ participation in management.
20.10 BENEFITS OF EMPLOYEE PARTICIPATION
Below you will find an overview of the benefits of increased participation.
The benefits are clear and are worth considering for many companies.
i) Proactive community
When all employees in a company actively participate in decision-making
and often share suggestions and ideas, the company as a whole benefits.
Employees who feel that their opinions are valued and actually acted upon
feel happier in the workplace and are more motivated to work for the
success of the company.
Employees then continue to engage well because the quality of the
product and their delivered results are important to them.
ii) Communication barriers are thus removed

Communication and assertiveness are important in business. This is
another great benefit.
When employees can effectively share their thoughts and suggestions

about the company, they are also more likely to point out bottlenecks in a
workflow in their daily work and come up with new, innovative ways to
improve things.
iii) Personal health
Increased participation also helps the (mental) health of employees,
although of course this is no guarantee. Other conditions for a good
workplace must also be respected.
In particular, stress is lowered by applying participation in organisations.
This is because they can express uncertainties regarding their
performance and business changes.
If stress is prolonged too long, it can have negative effects such as
increased blood pressure, lack of motivation and concentration, and
headaches.
iv) Productivity and quality
The benefits that this kind of participation brings in terms of productivity

and quality stem partly from those described above. Employee
236
productivity improves in a number of ways, including less stress, a more
efficient work environment and motivation and dedication resulting from
a safe working environment.
In addition, increased employee participation also benefits the quality of
the services or products produced. If employees are better informed
throughout the organisation, they can better communicate ideas to the
customer.
Employee participation vs. employee involvement
Employee participation refers to participation: The employees take
part in business activities. Employee involvement refers only to the degree
of input employees have on the business activities they perform. Although
the two concepts are similar, they are two different elements.
Employee participation requires a team approach. A group of employees
works together to achieve a common goal. Employee engagement,
however, is more about the direct connection between employees and
management to promote open communication and empower employees.
Both methods and approaches can create the same sense of commitment
among employees.
Employee Participation methods

Different techniques and ways to encourage employee participation have
been discussed above.
In addition, here are some examples of other ways to increase employee
participation:
• Naming competition for new projects or initiatives
• Establish a direct connection between higher and lower
management and the shop floor
• Provide employees with a fun working environment
• Initiate discussions
Employee Participation can be applied at various levels:
i. Participation at the administrative level
ii. Participation by ownership
iii. Participation through collective agreements
iv. Participation through job enlargement
v. Participation through quality circles
237
20.11 THE SUCCESS OF WORKER’S PARTICIPATION IN
MANAGEMENT IS LIMITED DUE TO THE FOLLOWING FACTORS
• Limited knowledge and education – Often the knowledge and
education of workers are limited to the area of their specialization of
work. They lack knowledge in managerial operations to participate
in management.
• Domination and bossism – Domination and bossism of
management group holds back the success and effectiveness of
workers participation in management.
• Conflict of interest – Conflict of interest between the employee’s
group and employer’s group affects the effectiveness of workers
participation in management.
• Weakness of trade union – Most of the time trade unions are not
strong enough to participate in management and express their
views and opinion because they lack finance, specialized
knowledge. Conflict of interest between different trade union
groups, domination of political parties hampers the effectiveness of
workers participation in management.
20.12 WORKERS’ PARTICIPATION MANAGEMENT – ECONOMIC,

PSYCHOLOGICAL AND SOCIAL POINT OF VIEW
1. Economic Point of View – Employees can contribute substantially to
the progress and prosperity of the organisation. They, therefore, have a
legitimate right to share equally the gains of higher production.
2. Psychological Point of View – It recognises non-economic needs of
the employees, raises motivation level and gives them sense of
importance, pride and accomplishment, freedom and opportunity for
expressions, a sense of belonging and creativity.
3. Social Point of View – It forges ties of better understanding between
individuals leading to better efforts all around. It leads to a happier society
engaged in productive and meaningful activities in the larger interest of
the nation
Generally, there are four ways in which workers participated:
1. Profit sharing
2. Consultation
3. Joint management
4. Self-management on the part of workers.
238
Labour management collaboration has been expressed in India’s policy
and the following objectives have been articulated in the Second Five
Year Plan-
i. Securing better welfare facilities for workers.
ii. Establishment of cordial relation between management and
workers and building up understanding and trust between them.
iii. Substantial increase in productivity in the interest of
management, workers and the nation.
iv. Training and education of workers to understand and share the
responsibilities of management.
LET US SUM UP
In this you have learnt about the Collective bargaining, the ongoing
process of negotiation between representatives of workers and employers
to establish the conditions of employment. The collectively determined
agreement may cover not only wages but hiring practices, layoffs,
promotions, job functions, working conditions and hours,
worker discipline and termination, and benefit programs.
The degree of centralization in the bargaining process and the functions
performed by collective agreements vary. Contract negotiation may occur
at the national, regional, or local level, depending on the structure of
industry within a country. National agreements, which are more common
in smaller countries, usually settle general matters, leaving more detailed
issues for local consideration. An agreement may, for example, set
actual wage rates, or it might simply establish minimum wage rates.
CHECK YOUR PROGRESS
1. Worker participation Employees have a genuine hunger for
participation
a) In organisational issues affecting their lives
b) In individual issues affecting their lives
c) The individual and organizational issues
d) All the above
2. Quality of work life such as
a) Work stress
b) Humanisations of work, industrial democracy, participative work
239
c) Job Engagement
3. Talent management naturally encompasses many of the
responsibilities of HR.
a) HR Practices
b) Many of the responsibilities of HR
c) Individual objective
d) All of the above
4. Competency Mapping is defined as the process of identifying the
a) key competencies, which have the ability to do something
efficiently & achieve
b) Competency Mapping
c) Job Efficiently
d) All of the above
5. What is collective bargaining?
a) Consultation between the employer and all employees

b) Debate between different organisations
c) Negotiation between an employer and a recognised trade union
d) A form of employee involvement
GLOSSARY
Collective : the representatives of business organization

Bargaining meet and attempt to negotiate a contract or
agreement
Competency : the representatives of business organization

Mapping meet and attempt to negotiate a contract or
agreement
SUGGESTED READINGS
McGraw Hill, India
240
4. Kothari, C.R., (2019),Research Methodology, Fourth Edition, New
Age International (P) Ltd, New Delhi.
5. Krisnasamy, O.R. and M. Ranganathan,(2010), Methodology of
Research in Social Science, latest Edition, Himalaya Publishing
House, Mumbai
WEB RESOURCES
1. https://www.economicsdiscussion.net/management/workers-
participation-in-management/31635
2. http://www.simplinotes.com/workers-participation-management/
3. Employee Participation - YouTube
4. Employee Participation and Involvement - YouTube
5. Workers Participation in Management (HRM) - Part I - YouTube

1. a) 2. b) 3. b) 4. a) 5.c)
241
242
Master of Commerce
SECOND YEAR
(Semester - 03)
MCOS -32
BUSINESS RESEARCH METHODS

www.tnou.ac.in
SYLLABUS
Course Title : BUSINESS RESEARCH METHODS
Course Credit :3
CO1. Explain research, types and process of research and identify the
problems. Discuss the significance of research in social sciences
and illustrate formation hypothesis
CO2. Discuss methods of sampling design and various techniques used
for constructing scale
CO3. Explain different methods of collecting data; differentiate between
primary and secondary data. State advantages and limitations of
schedule and questionnaire
CO4. Explain test of significance and techniques used for parametric
and non-parametric test
CO5. Discuss the significance of report writing, the procedure for writing
the report and ethical issues in research
COURSE SYLLABUS
BLOCK I: Research-An Introduction

Research: Meaning – Scope and Significance – Types of Research –
Research Process -Problems in Research – Significance of Research in
Social Sciences -Identification –Selection and formulation of problem –
Review of Literature -Research Hypothesis –Meaning – Sources – Types
- Formulation of Research Design – Features o Explain research, types
and process of research and identify the problems. Discuss the
significance of research in social sciences and illustrate formation
hypothesis
BLOCK II: Sampling Design & Techniques
Sampling Design: Senses Method and Sampling Method – Principles of
Sampling - Methods of Sampling –Probability and Non-Probability
Sampling Methods - Selection of a sample – Size – Criteria of Good
Sample Design -Scaling Techniques: Meaning Types of Scale - Scale
Construction Techniques.
BLOCK III: Data Collection
Data Collection: Types of Data – Sources of Data – Primary Data and
Secondary Data - Data Collection Methods – Observation – Survey –
Questionnaire – Interview Schedule - Effective in Interview Techniques
a
and Limitations of Interview-Constructing Questionnaire – Format of Good
Questionnaire – Advantages and Limitations of Schedules and
Questionnaire - Pilot Study- Analysis and Processing of Data: Meaning –
Editing – Coding and Tabulation –Diagrams.
BLOCK IV: Parametric & Non - Parametric Tests
Tests of Significance – Assumption about parametric and non-parametric
tests - Parametric Tests –Chi Square, T-Test, F-Test and Z Test - Non-
Parametric Tests UTests– Kruskal Wallis – Introduction to ANOVA – One
Way –Two Way –Multivariate Analysis –Correlation and Regression only
- Role of Software packages
BLOCK V: Report Writing & Ethical Issues in Research
Report Writing: Significance-Tests in Report Writing –Layout of report –
Types of Reports - Oral Presentation –Mechanics of writing Research
Report –Norms for using tables – Charts and Diagrams – Appendix –
Index and Bibliography - Ethical issues in Research.
REFERENCES

3. Kothari, C.R., (2019), Research Methodology, Fourth Edition, New
4. Krisnasamy, O.R. and M. Ranganathan, (2010), Methodology of
House, Mumbai.
5. Panneerselvam, R., (2010), Research Methodology, latest Editon,
Prentice Hall of India, New Delhi,
6. Vohra, N.D., (2017) Business Statistics, latest Editon, McGraw Hill,
New Delhi,
McGraw Hill, India
8. Ranjit Kumar (2014), Research Methodology, latest Edition, Sage,
India
9. Mukul Gupta & Deepa Gupta (2013), Research Methodology, latest
Edition, PHI, India.
10. Wayne l Winston, (2013), Excel Data Analysis and Business
Modeling, latest Edition, PHI, India.
b
WEB SOURCES
1. (PDF) Business Research Methods 12th Edition | Arman Hossain -

Academia.edu
2. BUSINESS RESEARCH METHODS free ebooks and study
materials - Bing video
3. Business Research Methods ( PDFDrive.com ).pdf
(gitamskadapa.org)
On completion of this course, learners would be able to:

CLO1. Comprehend the methods and techniques used in research and
provide with the knowledge and skill to undertake research.
CLO2. Examine various methods of sampling techniques and the
procedure to construct a scale
CLO3. Analyse different techniques to collect data and suitability of such
tool for presenting data.
CLO4. Interpret the result of statistical parametric and non-parametric
techniques for analysis of research data
CLO5. State the significance of report writing and illustrate the format of
report and the ethical issues in research
c
UNIT / CONTENTS PAGE
BLOCK NO.
UNIT 1 BUSINESS RESEARCH METHODS – AN 01
OVERVIEW
1.1 Business Research 02
1.2 Qualities of a Good Researcher 04
1.3 Research Process 06
1.4 Criteria of a Good Research 06
1.5 Problems encountered by Researchers in 07
India
1.6 Benefits of Business Research 07
UNIT 2 CLASSIFICATION OF RESEARCH 11
2.1 Arbitrary Research and Scientific Research 11
2.2 Classification of Research 13
2.3 Case Study 17
2.4 Research Methods and Techniques 19
UNIT 3 REVIEW OF LITERATURE 22
3.1 Review of Literature - Meaning 22
3.2 Literature Searching process 23
3.3 Sources of Literature 23
3.4 Purpose of Review 24
3.5 Planning for Review Work 25
3.6 Recording the Literature 25
UNIT 4 RESEARCH PROBLEM 28
4.1 Research Problem 28
4.2 Steps in Formulation of Research Problem 31
4.3 Criteria for Section of a Good Research 31
Problem
4.4 Evaluation of Research Problem 32
UNIT 5 RESEARCH HYPOTHESIS 35
5.1 Research Hypothesis – Meaning 35
5.2 Rules for Constructing Hypothesis 38
5.3 Difficulties in Formulation of Hypothesis 38
5.4 Testing of Hypothesis 38
BLOCK 2 SAMPLING DESIGN & TECHNIQUES
UNIT 6 RESEARCH DESIGN 42
6.1 Research design 43
6.2 Types of Research Design 44
6.3 Contents of Research Design 44
6.4 Contents of Research Design 63
d
6.5 Advantages of Research Design 63
UNIT 7 SAMPLING TECHNIQUES 67
7.1 Sample and Sampling 68
7.2 Methods of sampling 69
7.3 Sampling Error 72
7.4 Limitations of Sampling Techniques 74
7.5 Sample Size 74
UNIT 8 SCALING TECHNIQUES 78
8.1 Measurement 79
8.2 Test of Sound Measurement 80
8.3 Scaling 83
BLOCK 3 DATA COLLECTIONS
UNIT 9 SOURCES OF DATA 93
9.1 Sources of data 93
9.2 Secondary data 94
9.3 Documentary sources 95
9.4 Location services 96
UNIT 10 SCHEDULE AND QUESTIONNAIRE 99
10.1 Schedule – meaning 100
10.2 Questions to be included in schedule 101
10.3 Questionnaire 103
10.4 Distinction between schedule and 104
questionnaires
10.5 Questionnaire / Interview Schedule 106
UNIT 11 INTERVIEW METHODS AND DATA 118
COLLECTION
11.1 Observation 119
11.2 Interview 119
11.3 Surveys 129
UNIT 12 PILOT STUDY AND PRE-TESTING 135
12.1 Pilot study 136
12.2 Pre – Test / Pre - Testing 137
UNIT 13 DATA PROCESSING 142
13.1 Data Processing 143
13.2 Editing 143
13.3 Coding 143
13.4 Classification of Data 145
13.5 Content Analysis 146
13.6 Transcription 146
UNIT 14 TABULATION OF DATA 150
e
14.1 Tabulation - meaning 151
14.2 Types of Tables or Tabulation 151
14.3 Steps in preparation of Table 152
14.4 General principles of Tabulation 153
14.5 Grouped and Ungrouped Data 155
14.6 Advantages of Tabulation 156
14.7 Limitations of Tabulation 156
UNIT 15 ORGANISING DATA – GRAPHS AND 159
DIAGRAMS STRUCTURE
15.1 Frequency Table / Distribution 159
15.2 Diagrammatic Presentation of Data 164
BLOCK 4 PARAMETRIC & NON - PARAMETRIC
TESTS
UNIT 16 STATISTICAL TEST IN RESEARCH 182
16.1 Uni-variate Analysis 174
16.2 Bi-variate Analysis 176
16.3 Multi-variate Analysis 177
UNIT 17 PARAMETRIC TEST 182
17.1 Pearson Product Correlation Coefficient 182
17.2 Student T-test 184
17.3 The Z-Test 186
17.4 ANOVA Test 190
17.5 Advantages of Parametric test 196
17.6 Limitations of Parametric test 196
UNIT 18 NON-PARAMETRIC TEST 199
18.1 Chi-square Test 200
18.2 Spearman Rank Co-efficient 202
18.3 Mann-Whitney U Test 206
18.4 Kruskal-Wallis Test 208
18.5 Multiple Correlation 210
18.6 Multiple Regression Analysis 210
18.7 Regression Analysis 211
18.8 Another non-parametric test 215
18.9 Application of non-parametric test 217
18.10 Parametric test vs Non-Parametric test 218
18.11 Advantages of Non-Parametric Test 219
18.12 Limitations of Non-Parametric Test 219
UNIT 19 COMPUTER SOFTWARE APPLICATION IN 223
RESEARCH
19.1 Types of Software – A Preview 223
f
19.2 Other Software’s 226
BLOCK 5 REPORT WRITING & ETHICAL ISSUES IN
RESEARCH
UNIT 20 PREPARATION OF RESEARCH REPORT 233
AND APPENDIX
20.1 Research Report - Meaning 234
20.2 Types of Research Report 236
20.3 Typing the Research Report 239
20.4 Chapters Planning 239
20.5 Plagiarism 239
20.6 Synopsis 240
20.7 Research Proposal 240
20.8 Evaluation of Research Report 240
20.9 Viva-Voce Examination 240
20.10 Ethics in Research 241
20.11 Bibliography 243
20.12 Footnotes 244
20.13 References 245
20.14 Index 245
20.15 Quotations 245
20.16 Abbreviations 245
20.17 Acronyms 246
20.18 Figures 246
20.19 Comprehensive Table 246
20.20 Questionnaire / Schedule 246
20.21 Glossary of Terms 246
20.22 Common Abbreviation used in Research 246
20.23 Others 248
g
BLOCK 1
RESEARCH-AN INTRODUCTION
UNIT 1 : BUSINESS RESEARCH METHODS – AN

OVERVIEW
UNIT 2 : CLASSIFICATION OF RESEARCH
UNIT 3 : REVIEW OF LITERATURE
UNIT 4 : RESEARCH PROBLEM
UNIT 5 : RESEARCH HYPOTHESIS
1
UNIT 1
BUSINESS RESEARCH METHODS – AN
OVERVIEW
STRUCTURE
Overview
Learning Objectives
1.1 Business Research
1.1.1 Objectives of Business Research
1.1.2 Nature of Business Research
1.1.3 Importance of Business Research
1.1.4 Significance of Business Research
1.2 Qualities of a Good Researcher
1.3 Research Process
1.4 Criteria of a Good Research
1.5 Problems encountered by Researchers in India
1.6 Benefits of Business Research
Let us sum up
Check your progress
Glossary
Suggested Readings
Answer for check your progress
OVERVIEW
Research is an endeavor to, discover, develop and verify knowledge. It is
an intellectual act that begins with asking questions and progressiveness
through the critical examination of evidence that is both relevant and
reliable to revelation of truth. Research can be defined as search for
knowledge or as any systematic investigation, with an open mind to
establish novel facts, solve new or existing problems, prove new ideas, or
develop new theories usually using a scientific method.
The aim of business research is to generate accurate information for use

in decision making. Business research generates and provides the
necessary qualitative or quantitative information upon which to base
decisions. By reducing the uncertainty of decisions, research reduces the
risk of making wrong decisions. However, research should be an aid to
managerial judgment, not a substitute for it. This unit will give an in-depth
knowledge of business research and its scope to the readers.
2
LEARNING OBJECTIVES
• describe the nature and importance of business research
• point out the steps in research
• discuss the criteria of good research
1.1 BUSINESS RESEARCH

Business research refers to the systematic and objective process of
generating information for aid in making business decisions. In other
words, business research means a systematically organized effort to
investigate specific problems encountered by the business that needs
solution.
Business research is defined as “a systematic inquiry that provides
information to guide managerial decisions. More specifically, it is a
process of planning acquiring, analyzing and disseminating, relevant data,
information and insights to decision makes in ways that mobilize the
organization to take appropriate in turn, maximize business performance”.
According to Clifford woody defines, “Research comprises, defining and
redefining problems, formulating hypothesis or suggested solutions;
collecting, organizing and evaluating data; making deductions and
reaching conclusions and finally, carefully testing the conclusions to
determine whether they fit the formulating hypothesis”.
In the words of Pauline V. Young defines, “Research as a scientific
undertaking which, by means of logical and systematic techniques, aims
to:
1) Discover new facts or verify and test old facts,
2) Analyze their sequence, interrelationships and causal
explanations,
3) Develop new scientific tools, concepts and theories which would
facilitate reliable and valid study of human behavior. This
exhaustive all-inclusive definition specifies all the major aims of
research, viz, discovery of new facts, verification and testing of old
facts, analysis of inter relationships and causal explanations and
inter relationships and causal explanations and development of
new tools, concepts and theories.
The above definition clearly revealed the need and purpose of executing
business research.
3
1.1.1 Objectives of Business Research
The objectives of research are varied according to the study. Although
every research study has its own specific objectives, the research
objectives may be broadly grouped as follows.
• To gain familiarity with new or new insights into a phenomenon.
• To accurately portray the characteristics of a particular individual,
group, situation, an event or a problem.
• To analyse the frequency with which something occurs.
• To examine a hypothesis of a causal relationship between two
variables.
• To extend knowledge of human beings, social life and
environment.
• To bring to light information that might never be discovered fully
during the ordinary course of life.
• To establish generalizations and general laws and contribute to
theory building in various fields of knowledge.
• To verify and test existing facts and theory and this helps improve
our knowledge and ability to handle situations and events.
• To find solutions to problems viz, health problems, socio-economic
problems, human relations problems in organisation, and so on.
• To develop new tools, concepts and theories for a better study of
unknown phenomena.
• To help national planning and thus contribute to national
development, and so on.
1.1.2 Nature of Business Research
The nature and characteristics of business research are listed in the
following lines:
• It is closely associated with social sciences research.
• It is useful to solve business problems that are related to
managerial practices.
• It uses knowledge from a wide range of disciplines.
• It addresses business issues and practical managerial problems.
• It is an emerging field of studying business environment.
1.1.3 Importance of Business Research
The importance of business research involves:
• Research is a scientific process
• It leads to the solution to the existing problem.
• It directs towards the development of new principles of theories or
modifies the existing literature will be helpful in predicting future
occurrences.
• It is based on observable experiences or empirical evidence.
4
• It is characterized by patience and unhurried activities.
• It is carefully recorded and reported.
• It is the task of experts in the related discipline of the study.
• It is an intellectual task.
1.1.4 Significance of Business Research
Research gives us satisfaction of known to unknown things. It opens our
eyes to know the social reality, simplifying the mystery within the common
place in social life. Moreover, the significance of research is listed as
under:
• It provides guidance to social planning.
• It facilitates control by providing knowledge.
• It helps to enlighten the knowledge.
• It suggests effective remedial measures.
• It affords a sound basis for prediction.
• It helps to formulation of social laws.
• It also helps to improve the tools and technique of research.
• It provides solutions to the new problems.
• It also provides solutions of endless social problems.
• It helps to better understanding among the different groups.
• It also helps the overall development of society and nation.
1.2 QUALITIES OF A GOOD RESEARCHER
It is important for a researcher to have certain qualities to conduct
research. A good researcher should be in possession of the following
qualities:
• The researcher should be a votary of truth.
• The Researcher should be able to dispel prejudice.
• The Researcher should be capable of gathering accurate and in-
depth information.
• The Researcher should be a keen observer of the phenomena.
• The Researcher should always maintain precision.
• The Researcher must analyse and interpret the collected
information.
• The Researcher must possess an alert mind.
• The Researcher must conduct scientific enquiry which is pre-
eminently an intellectual effort.
• The Researcher should be in possession of sufficient moral
courage to face the difficulties.
• The Research should be able to utilize the time properly.
• The Researcher should be computably clear.
• A good researcher will always be well behaved and well clad.
5
1.3 RESEARCH PROCESS
Research is an endless quest for knowledge or unending search for truth.
The success of a research work, to a great extent, depends upon the
motivation of both the researchers and respondents. The research
process involves the following steps:
• Formulation of research problem.
• Extensive literature survey.
• Fix the objectives of the study.
• Developing hypothesis.
• Preparing the research design.
• Determining sample design.
• Collection of data
• Analysis of data.
• Hypothesis testing
• Execution of thesis.
• Generalization and interpretation and
• Preparation of the report or presentation of results.
1.4 CRITERIA OF GOOD RESEARCH

The essential criteria of good scientific research methods as summed up
by the Advisory Committee on Economic and Social Research of council
of social science research are:
• Careful logical analysis for the problem, separating its elements
and whenever possible, formulating hypothesis.
• Unequivocal definition of terms and concepts and statistical units
and measures, so that others will understand exactly and be able
to repeat the analysis and test the generalizations.
• Collection of data pertinent to the problem under study.
• Classification of data.
• Expression of variables in quantitative terms whenever possible.
• Rigorous and exacting experimental or statistical procedure in
summarizing the data and in isolating the attributes or variables
and measuring their relationships and inter-effects.
• Sound logical reasoning so to the testing of hypothesis and
drawing generalizations.
• Statement in unassailable terms of the exact conclusion arrived at
from the findings.
• Specific and clear statement of generalizations to facilitate
checking and testing by others.
• Complete elimination of personal equation and
6
• Complete and careful reporting of the research process,
definitions and methods of analysis so that others can check the
analysis or test the generalizations with new sets of data.
1.5 PROBLEMS ENCOUNTERED BY RESEARCHERS IN INDIA

Researchers particularly those who engaged in empirical research are
facing several problems in India. They are:
• Lack of scientific training in the methodology of research is a great
impediment for researchers in our country.
• Insufficient interaction between the university research
departments on one side and business establishments,
government departments and research institutions on the other
side.
• The concept of secrecy seems to be sacrosanct to business
organizations in the country so much that it proves an
impermeable barrier to researchers.
• The research studies are overlapping with one another and are
undertaken quite for want of adequate information.
• There is no code of conduct existing for researchers and inter-
university and interdepartmental rivalries are also quite common.
• There is also the difficulty of timely availability of published data
from various government and other agencies doing this work in
our country.
• Lack of knowledge in problem conceptualization and also
problems relating to the process of data collection and related
things.
• The library management and functioning is not satisfactory at
many places and much of the time and energy of researchers in
spent in tracing out the books, journals, reports and so on.
• There is also the problem that many of our libraries are not able to
get copies of old and new act rules, reports and other government
publications in time.
• The vast majority of researchers in our country also face the
difficulty of adequate and timely secretarial assistance, including
computerized software application assistance.
1.6 BENEFITS OF BUSINESS RESEARCH
The benefits of business research are broadly classified into two major
categories. They are
a) Benefits of Business and
b) Benefits to Society
7
a) Benefits of Business
Business research provides the following benefits to business:
• It helps business firms to take business decisions
• It helps to forecast sales.
• It assists to effective production planning.
• It facilitates taking proper investment decisions
• It assists to human resources planning
• It helps to collect information on the economic and social structure
of a nation.
• It helps to project profit and loss estimation during the operating
cycle and so on.
b) Benefits to Society
Business research has given the following benefits to society:
• It helps to give solutions to various social problems.
• It assists business executives and researchers to attain a high
position in society.
• It helps thinkers and philosophers to develop creativity.
• It also to analysts and researchers to develop a creative way of
working.
• It expands the services towards the society and the overall
development of the country.
• The finding assists in solving future problems
LET US SUM UP
The aim of business research is to get accurate information for use in
business decisions. This unit will give a preview relating to business
research in terms of meaning, nature and characteristics, types of
important areas of business research, the benefits of business research
to business and society. However, business research should be an aid to
managerial judgment, not a substitute for it.
CHECK YOUR PROGRESS
1. The term research denotes
a) Discover new facts
b) Invent new things
c) Verify old facts
d) All the above
2. Research in modern times is carried out mainly in
a) Universities
8
b) Industrial organisations
c) Government organisations
d) All the above
3. How does research start?
a) From the hypothesis
b) From an answer
c) From a problem of some sort
4. Which of these is not a method of data collection?
a) Questionnaires
b) Interviews
c) Observation
d) Experiments
5. Thomas Alva Edison invented the electric lamp is an example for;
a) Applied Research
b) Fundamental Research
c) Case Study
d) Opinion Research
GLOSSARY
Research : Research is a systematic effort to gain new

knowledge
Business : It is a systematic inquiry that provides
Research information to guide managerial decisions.
SUGGESTED READINGS
1) Arora, P.N. & S. Arora, (2007), Statistics for Management, latest
2) Dwiedi, R., (2011), Research Methods in Behaviour Science,
latest Edition, Macmillan India Ltd., New Delhi.
3) Gupta S L (2017), Business Research Methods, latest Edition,
McGraw Hill, India
4) Kothari, C.R., (2019), Research Methodology, Fourth Edition, New
5) Krisnasamy, O.R. and M. Ranganathan, (2010), Methodology of
House, Mumbai.
6) Mukul Gupta & Deepa Gupta (2013), Research Methodology,
latest Edition, PHI, India.
9
7) Panneerselvam, R., (2010), Research Methodology, latest Edition,
8) Ranjit Kumar (2014), Research Methodology, latest Edition, Sage,
India
9) Vohra, N.D., (2017) Business Statistics, latest Edition, McGraw
Hill, New Delhi,
10) Wayne l Winston, (2013), Excel Data Analysis and Business
Modelling, latest Edition, PHI, India.
WEB RESOURCES
1. What Is Business Research? (chron.com)
2. unit 5 Research Methodology (tamil) - Bing video
3. Chapter-2: Business Research Design Process | Research
Methodology | MBA Lecture Series - Bing video
4. Introduction to Business Research I Business Research I 1st
Lecture - Bing video
1.d) 2.d) 3.c) 4.d ) 5.b)
10
UNIT 2
CLASSIFICATION OF RESEARCH
STRUCTURE
Overview
Learning Objectives
2.1 Arbitrary Research and Scientific Research
2.1.1 Scientific Vs Non-Scientific Research
2.2 Classification of Research
2.3 Case Study
2.3.1 Case Study Vs Survey Method
2.4 Research Methods and Techniques
2.4.1 Research methods Vs Techniques
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The present fast track business environment the business firms face
various problems and issues. To gain competitive advantages the
business executives and researchers, even government also go far
execute research activities. This unit will give special care to all the types
of research. After reading this unit the readers will get a sound knowledge
of various types of research.
LEARNING OBJECTIVES
• explain scientific research and arbitrary research
• discuss the different types of research.
• distinguish case study from survey method
• differentiate research methods and techniques.
2.1 ARBITRARY RESEARCH OR NON-SCIENTIFIC RESEARCH
Arbitrary methods of research seeking answers to questions or solutions
to problems consist of imagination, opinion, blind belief or impression.
Similarly, we form our own impressions about various issues and
problems. For example, it was believed that the shape of earth was flat,
and so on. The arbitrary method suffers from serious drawbacks and
limitations, it is subjective, and the findings will vary from individual to
11
individual depending on their own impressions and imagination. It is
vague and accurate as proved by scientific research.
Scientific Research
Scientific research is a systematic rational approach to seeking reality or
facts. It mainly eliminates the drawbacks of the arbitrary method. It is
objective, precise and arrives at a conclusion on the basis of verifiable
evidence. The researcher’s qualities and attitudes are more important
than the procedural steps. The researcher needs, the scientific
imagination to construct hypothesis, the analytical ability to device crucial
experiments to test hypotheses, the resourcefulness, manipulative skill
and persistence to carry through the experiment, the perspective which
distinguishes the essential from the non-essential and the reasoning
which co-ordinates individual facts into a principle. He must also possess
the spirit of originality.
Above all, the scientific method calls for scientific attitude. It is based on
a complexity of elements identified by Pauline V. young namely,
a) Consistent thinking.
b) Unbiased devotes to collection and treatment of facts.
c) Overcoming personal preconceptions.
d) Avoiding personal and vested interest.
e) Avoiding wishful thinking.
f) Stubborn determination to analyse one’s own way of thinking.
g) Faith in the universality of cause and effect.
h) Ardent curiosity, fertile imagination and love of experimental
inquiry.
i) Ability to rise from failure with a new sense of inquiry.
j) Self-control patience and ability to overcome wishful thinking.
k) Compassion and understanding, without this knowledge could be
very dangerous and knowledge could be very dangerous and
l) Keeping an open mindedness.
The above said elements are components of the scientific attitude. These
elements tend to correct not only factual error, but also mental, emotional
and volitional frailties of a researcher.
2.1.1 Scientific Research Vs Non-Scientific Research
Both Scientific research and non-scientific research are varying in the
following ways:
12
S.No Scientific Research Non-Scientific Research
1. It is more objective It is more subjective
2. It is scientific with It is carried out in a haphazard

predetermined objectives manner.
3. It measures the results more It cannot measure the results.

accurately.
4. It considers all the facts that It does not consider all the facts
are pertinent to the problem at that are pertinent to the
hand. problem at hand.
5. It involves a number of The sophisticated statistical

statistical techniques are tools may not applicable.
applied to analyse the data.
2.2 CLASSIFICATION OF RESEARCH

The classification of research is just an approach to differentiate the
distinctive approaches to research for the purpose of understanding. The
important types of research are given in the subheads:
1) Fundamental Research: It is also known as pure research or
basic research. Fundamental research is undertaken for the sake
of knowledge without any intension to apply it in practice. It aims
at extension of knowledge. It may lead to either the discovery of a
new theory or refinement of an existing theory or invention of new
things. The findings of this research enrich the storehouse of
knowledge that can be drawn upon in the future to formulate
significant practical researchers. The findings of this research also
formed the basis for innumerable scientific and technological
inventions. Example, Sir Issac Newton’s contributions. Thomas
Alva Edison’s contribution, etc., are good examples for
fundamental research.
2) Applied Research – It is carried out to find solutions to a real-life
problem facing a society or an industry or a business house. Thus,
it is the application of the existing theory on a particular issue.
Though the immediate purpose of an applied research is to find
solution to a practical problem, it may incidentally contribute to the
development of theoretical knowledge by leading to the discovery
of new facts or testing of theory or to conceptual clarity. For
example, Elton Mayo’s Hawthorne Experiments, Nestle’s Maggi
Noodles issues, etc.
13
Difference between Fundamental Research and Applied Research
Both Fundamental research and applied research are differential in the
following words:
S.No Fundamental Research Applied Research

1. It aims to contribute theory It aims to solve problem very
and techniques of the immediately.
discipline in long run.
2. It requires also a sense of what
It requires mainly technical
the situation and personalities
judgment
can bear.
3. It often seeks individual cases
It seeks generalization
without the objective to
generalize.
4. It tries to say why things It tries to say how things can be
happen changed.
5. It attempts to get all the facts It attempts to get only the correct
fact for the situation.
6. It aims at publishing the It aims at bringing out the
research report actionable points
7. The report in presented in The report is presented in
technical language of the common language
discipline
(i) Other Types of Research – The majority of the research activities

are classified into fundament research and applied research for the
purpose of understanding we discuss the other types also:
a) Explorative Research – It is also known as formulative research. It
is the preliminary study of an unfamiliar problem about which the
researcher has little or no knowledge. It is similar to a doctor’s initial
investigation of a patient suffering from an unfamiliar malady for
getting some clues for identifying it. It is ill structured and much less
focused on predetermined objectives. It is usually taking the form of
a pilot study. Though at are separate types of research, it is
appropriate to consider it as the first stage of a three-stage process
of exploration, description and experimentation.
b) Descriptive Research - This study aims to fact finding investigation
with adequate interpretation. It is the simplest type of research. It is
more specific than an exploratory study, as it has focus on particular
aspects or dimensions of the problem studied. It is designed to gather
disciplined information and provides information for formulation more
14
sophisticated studies. Required data are collected by using one or
more appropriate methods through observation, interviewing and
mail questionnaire.
c) Diagnostic Research – This study is similar to descriptive towards
discovering what is happening, why it is happening and what can be
done about it. It aims to identify the causes of a problem and the
possible solution for it. In other words, diagnostic study is more
directly concerned with casual relationships and with implications for
action.
d) Evaluation Research – it is also one of the methods of applied
research. It is made for assessing the effectiveness of social or
economic programmes implemented or for assessing the impact of
developmental projects on the development of the project area. For
example, the poverty alleviation programme, government of India.
e) Action Research – It is also a type of evaluation study. It is a
concurrent evaluation study of an action programme launched to
solve a problem or for improving an existing situation. The success
of the action research depends on the co-operation of action
implementing people and beneficiaries of the action programme.
f) Experimental Research – is designed to assess the effects of
particular variables on a phenomenon by keeping the other variables
constant or controlled. The nature of relationship between
independent variables and dependent variables is perceived and
staled in the form of causal hypothesis. For example, agricultural
productivity, here yield per hectare is dependent variable and the
factors such as soil fertility irrigation, quality of seed, manuring and
cultural practices which influence the yield are independent
variables.
g) Analytical Research – it is a system of procedures and techniques
of analysis applied to quantitative data. It may consist of a system of
mathematical models or statistical techniques applicable to
numerical data. This study also aims at testing hypothesis and
specifying and interpreting relationships.
h) Historical Research – It is a study of past records, events and other
information sources with a view to reconstructing the origin and
development of an institution or a movement or a system and
discovering the trends in the past. It also aims to draw explanations
and generalization from past trends in order to understand the
present and to anticipate.
i) Survey Research – It is popularly known as surveys. It is a fact-finding
study. This method of research involves collection of data directly
15
from a population or a sample thereof at a particular time. It requires
expert and imaginative planning, careful analysis and rational
interpretation of findings. The data may be collected by observation
or interviewing or mailing questionnaire.
j) Field Studies – are scientific enquiries aimed at discovering the
relations and interactions among sociological, psychological and
educational variables in real social structures and life situations like
communities, schools, factories, organisation and institutions. The
situation is selected and the relations among the attitudes, values,
perceptions and behaviours of individuals and groups in the selected
situation are studied.
k) Operations Research – It aims to the application of mathematical,
logical and analytical techniques to the solution of business problems
of cost minimization or profit maximization or optimization problems.
l) Market Research – It is the study of the structure and development
of markets for the purpose of formulating efficient policies for
production and marketing of goods and services.
m) Empirical Research – It relies on experience and observation. In
other words, empirical research refers to a study made on experience
and observation through sensory organs. It is data-based research,
coming up with conclusions which are capable of being verified by
observation or experiment.
n) Ex-post Facto Research – is a systematic empirical enquiry. It
provides a partial solution to the time order problem. It is
retrospective or after the event study. It looks from the past to the
present. It requires information about the past by asking retrospective
questions regarding an earlier period.
o) Conclusive Research – exploratory research is based on the
development of some tentative hypothesis. The data are collected
and analysed based on the objective of the study to test the derived
hypothesis and based on the results, the hypothesis is evaluated.
After evaluating the hypothesis, a decision-making framework is
formulated, and various conclusions can be drawn. This process is
known as conclusive research. The experts in the field of research
have generally classified conclusive research into two categories,
both descriptive research and experimental research. (Please refer
the subheads (b) and (f) for more reading)
p) Ethnographic Research – The term ethnography is rooted in
cultural anthropology, which denotes scientific description of people.
The ethnographic research represents an opportunity for companies
wishing to move from production and sales orientation to a market
16
orientation that emphasizes benefits for both companies as well as
to the customers.
q) Motivation Research – This is a type of qualitative research aims at
discerning the underlying motives and desires, using an in-depth
interview. It is concerned with the determination of motivations
underlying consumer behaviour. It involves the techniques of
research are sentence completion tests, word association tests, story
completion tests, etc.
r) Quantitative Research – this method of research is based on the
measurement of quantity or amount. It is concerned with qualitative
phenomenon and phenomena relating to quality or amount or kind.
s) Qualitative Research – This method aims to discover the underlying
motives of human behaviour. It analyses the various factors which
motivate people to behave in a particular manner or which make
people like or dislike a particular thing. It relies on the collection of
qualitative data. It includes fine major types of qualitative research,
phenomenology, ethnography, case study, grounded theory, and
historical research.
t) Opinion Research – it is also known as attitude research. It is a
qualitative research study to find out how people feel or what they
think about particular subject or institution.
u) Conceptual Research – This research is related to abstract ideas or
theory. It is mainly used by philosophers and thinkers to develop new
concepts or to reinterpret existing ones.
2.3 CASE STUDY
The term case has different meanings in different disciplines of
professions. For example, in medical sciences it means a patient who has
approached the doctor for specific treatment, in educational field the
maladjusted interpersonal problem, in social sciences research especially
in management the term case refers to the unit or institution or a process
and so on.
A Case is a description of a situation real or hypothetical involving some
problems to be solved. Case study is an in-depth comprehensive study of
a person, a social group, an episode, a situation, a programme,
community, an institution or any other social unit. It is one of the most
popular types of research methods. The case study is defined as different
scholars in different ways:
According to Pauline V. Young has defined as “case study is a
comprehensive study of a social unit be that unit a person, a group, a
social institution, a district or a community”. In the words of Star A. Queen
has defined as case study is the examination of a single situation,
17
persons, groups or institutions as complex wholes in order to identify types
and process.
According to Burgers is defined as case study is defined as “the social
microscope”.
Objectives of case study
Unlike textbooks and lecture notes, managerial cases do not provide
definite answers. The purpose of case analysis is not to learn authoritative
answers to specific managerial problems. Rather it is to develop skills in
the process of designing workable plan of action through evaluation of the
prevailing situation. Thus, the objective of case study involves:
• Providing exposure to real business or managerial situations.
• Helping researchers or investigators to acquire the skills of
applying concepts into practice.
• Developing the investigators’ ability to diagnose problems,
analysing and evaluating alternatives and formulating workable
problem solving and decision-making skills.
• It also aims to train the participants to work out solutions
themselves instead of relying upon other sources.
• It basically aims at work based on the principles of upon any other
sources.
• It basically aims at work based on the principles of “Learning by
doing”.
2.3.1 Case Study Vs Survey Method
S.No Case study Survey method
1.
It is an intensive investigation It is a broad-based
investigation.
2.
It is a study of a single unit or It covers a large number of
group. units.
3.
The findings of the study The findings of the study can
cannot be generalized be generalized.
4.
It is useful for testing It is useful for testing
hypothesis about the structural hypothesis about large social
and procedural characteristics aggregates.
of the specific unit.
18
2.4 RESEARCH METHODS AND TECHNIQUES
Research methods are the strategies, processes or techniques utilized in
the collection of data or evidence for analysis in order to uncover new
information or to create better understanding of a topic. The research
techniques which assist to performing research and forming hypotheses
into thesis. Research techniques are necessary to perform research and
make new discoveries. They are different methods or models that are
used to test their hypothesis, uncover a waiver to problems and provide
evidence for theories and inventions
2.4.1 Difference between Research methods and Techniques
S.No Research Methods Research Techniques
1. It is a systematic study of It is the actual procedure of

limited and definite subject collecting data.
matter.
2. It has a fixed outlay and It does not follow fixed outlay

follows scheduled steps and steps.
3. It is common to all It is not common to all

disciplines disciplines
4. It is independent of The scope of the techniques is

techniques limited.
5. The scope of the method is The scope of the techniques is

wider. limited.
6. The main scientific methods The main techniques of social

are induction, deduction sciences research are
and comparison, historical, observation, questionnaire or
structural and functional. schedule, interview and
documentation.
LET US SUM UP
Let us sum up this unit; the present business world business firms face
various problems and issues. The systematic way of executing the
business research activities assists to solve the business problem. In this
unit, we have discussed both scientific and non-scientific research,
fundamental and applied research. Moreover, different types of applied
research methods and differences between research methods and
research techniques also. This will give a very good understanding to the
readers of types of research.
19
CHECK YOUR PROGRESS
1. Who defined “Research” as “systematized effort to gain new
knowledge”?
a) Tom & Zerry
b) Redman and Mory
c) F.W Taylor
d) Ross Taylor
2. A test of research aptitude for candidates of the UGC NET, is aimed
at
a) providing basic idea of search to the candidates
b) Screening the persons having scientific bent of mind
c) providing a database of ‘future’ scientists of the country to the
Government
d) putting obstacles to the candidates
3. A researcher should consider himself as
a) Open minded and radical
b) A status-quo maintainer
c) Fairly knowledgeable
d) Entirely dependent on the teacher
4. Survey research methods come under
a) Pre-empirical research methods
b) Descriptive research methods
c) Experimental research methods
d) All of the above
5. Which of the following is/are categories of social research?
a) Laboratory experiment
b) Field experiment
c) Survey research
d) All of the above
GLOSSARY
Scientific : Systematic rational approach to seeking

Research reality or facts
Fundamental : Basic research, or pure research or
Research fundamental research, is a type of scientific
research with the aim of improving scientific
theories for better understanding and
prediction of natural or other phenomena.
20
Applied Research : Applied research refers to scientific study and
research that seeks to solve practical
problems.
Case Study : Case study refers to an intensive study about
a person, a group of people or a unit, which is
aimed to generalize over several units
SUGGESTED READINGS
McGraw Hill, India
4) Kothari, C.R., (2019),Research Methodology, Fourth Edition, New
5) Krisnasamy, O.R. and M. Ranganathan,(2010), Methodology of
House, Mumbai.
India
Hill, New Delhi,
10) Wayne l Winston,(2013), Excel Data Analysis and Business
WEB RESOURCES
1. Research Methodology Lecture Series (Episode 1) - Bing video
2. Introduction to Research Methodology and Research Methods
Lecture 1 - Bing video
3. 8 Types of Research| Business Research| Qualitative,
Quantitative, Basic, etc| Shagun Smith Francis - Bing video
1.b) 2.b) 3.a) 4.b) 5.d)
21
UNIT 3
REVIEW OF LITERATURE
STRUCTURE
Overview
Learning Objectives
3.1 Review of Literature - Meaning
3.2 Literature Searching process
3.3 Sources of Literature
3.4 Purpose of Review
3.5 Planning for Review Work
3.6 Recording the Literature
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The review of literature is not mere reading for reading sake; it is also not
a causal reading like a novel fiction or story. It focuses on a specific
purpose. A researcher has to select the kinds of literature to be reviewed
and determine the purpose which has to study them. The literature review
starts with the selection of a problem for research, continues through
various stages of the research process and ends with research report
writing. In this unit we go to discuss the meaning of literature review,
literature searching procedure, sources, purpose and recording of
literature. Really, this will help the readers to undergo the research work
ahead.
LEARNING OBJECTIVES

• discuss the review of literature
• know the sources of literature
• discuss the purpose of literature review
• record the literature
3.1 REVIEW OF LITERATURE - MEANING
Literature review is the documentation of a comprehensive review of

published and unpublished work from secondary sources of data in the
areas of specific interest to the researcher. The main object is to find our
22
problems that are already investigated and those that need further
investigation.
In other words, literature review is an extensive survey of all available past
studies relevant to the field of investigation. It gives us knowledge about
what others have found out in the related field of study and how they have
executed the work so.
3.2 LITERATURE SEARCHING PROCESS
The researcher has to review the various kinds of literature relating to the
selected field of study and how he can identify the related materials. It
consists of a series of steps. The exact steps will vary depending upon
the subject and the knowledge of the researcher. Even though general
procedure is given below:
a) Request learned professors, research institutions, industrial
executives, librarians or others familiar with the field to suggest
relevant references.
b) Find out whether any bibliography already prepared on the
subject is available in a library.
c) Consult bibliographies in the theses on the topic and related
topics.
d) Find subject catalogue cards to locate the titles and other details
of the books on the subject.
e) Examine periodicals, monographs, reports and conference
proceedings and other materials.
f) Examine the microfilms available in the library.
g) Consult reference cited in the books and articles already located.
h) Find out abstracts section in the journals relating to the subject.
i) Refer the book review pages in the daily newspapers, and in the
journals.
3.3 SOURCES OF LITERATURE
The sources of documentary information can aid the process of locating
literature relating to selected research topics. They are associated
encyclopedia, yearbooks, textbooks, journal, reports, research reports
and dissertations, newspapers, microfilm and other micro forms. Even
through the sources of literature is presented in the following sub-heads:
a) Subject catalogues available from libraries.
b) Documentation centers attached to national institutions, ICSSR –
New Delhi, NDCMC – New Delhi, SENDC – Hyderabad, CRD –
Hyderabad, NCHER – New Delhi, CESS – Hyderabad and so on.
23
From these centers codified information on any topic can be
obtained on payment of a normal fee.
c) Bibliographies – the important bibliographies are Indian National
Bibliography – Calcutta, The library congress Accession List –
South Asia, US Library Congress office – New Delhi, Asian Social
Science Bibliography New Delhi, and Bibliographies of Libraries.
d) List of Books and publishers’ bulletins, catalogues, from various
publishers in India and Abroad.
e) Journals – The names of journals and index of articles published
in them are available sources like, various India Index, Guide to
Indian periodical literature, Indian press Index, Documentation
fortnightly, Documentation of Asia, Indian Index series, EPW,
Southern Economist, and American Economic Review, etc.
f) Government Reports – Government of India publisher
administrative reports of various departments, reports of
commissions and committees India – A Reference Annual, and so
on.
g) Research Abstracts – abstracts of research completed are
available in the form of ICSSR Research Abstracts, Indian
dissertation Abstracts, ICSSR Journal of Abstracts and Reviews,
Dissertation Abstracts International and so on.
h) Information on Research done – information on doctoral research
work already done is available in the firm of bibliography of
doctoral dissertations accepted by Indian universities, Doctorates
in social science awarded by Indian universities, university news,
ICSSR Survey of Research in Social Sciences, Foreign Thesis on
India, American Doctoral Dissertations, etc.
i) Xerox University microfilms.
The above sources are highly authenticated for the researchers to
undergo research work in humanities and social sciences including
business research.
3.4 PURPOSE OF REVIEW
The purpose of reviewing related literature in research involves:
a) To gain background knowledge of research topics.
b) To identify the concepts relating to potential relationship between
the concepts and formulate researchable hypothesis,
c) To identify appropriate methodology, research design, methods of
measuring concepts and techniques of analysis.
d) To identify data sources used by other researchers.
e) To know how others structured the reports.
24
3.5 PLANNING FOR REVIEW WORK
The planning for review means the systematic and organized way of
gathering and noting information from printed sources. This plan involves
three steps:
a) To decide what information is useful for the steps:
b) To determine how to record what is gathered from published
material.
c) To set up an orderly note taking system.
3.6 RECORDING THE LITERATURE
The most suitable method of recording literature is the recording system
that involves the use of two sets of cards. One set of cards (3” x 5” Cards)
know as source cards, is used for noting bibliographic information and
second set (5” x 8” cards), known as note cards, is used for actual note
taking.
a) Source cards – the recording of bibliographic information in the source
cards should be made in proper bibliographic format. The following format
is used to write books and journals:
i. For Books – Authors name, the title of the book, the publishers
name, place of publication, year of publications, pages.
ii. For articles – Authors name, the title of the article, the journals
name, publishers name, place of publication, Volume No, Issue No,
month, date and year of publication pages.
b) Note cards – the information extracted from a printed source is
recorded on the note cards. It is desirable to note a single fact or idea on
each card. This promotes maximum flexibility. One side of the card is
used.
The format may be adopted for achieving maximum flexibility involves, on
the left-hand top corner the source reference code may be marked and
the right-hand top corner the number of the researcher’s proposed chapter
is placed on the space between place the title of the broad theme, idea,
or fact is placed. The note cards may be preserved in a card index box as
they may be useful for related researchers or writing thesis or articles.
LET US SUM UP
Let us sum up this unit; review of literature is an extensive survey of all
available past studies relevant to the field of investigation. It assists to gain
background knowledge of the research topic. It also assists to identify
appropriate methodology, research design, methods of measuring
25
concepts and techniques of analysis. Moreover, we have discussed the
sources of literature, recording the literature and so on. This unit will give
a fruitful one to the readers to understand review of literature in research
work.
CHECK YOUR PROGRESS
1. Comparisons of non-statistical variables are performed under which
method of literature review?
a) Narrative Method
b) Systematic Method
c) Meta-Analysis Method of Literature Review
d) Meta-Synthesis Method of Literature Review
2. Literature review is not like
a) Annotated Bibliography b) Abstract
c) Survey d) All of these
3. Literature collected for review includes
a) Primary and Secondary Sources
b) Secondary and Tertiary Sources
c) Primary and Tertiary Sources
d) None of these
4. The main purpose of finalization of research topics and sub-topics is
a) Collection of Literature b) Collection of Questions
c) Collection of Statistics d) Collection of Responses
5. Literature review is basically to bridge the gap between
a) Newly established facts
b) Previously established facts
c) Facts established from time to time
d) Previous to current established facts
GLOSSARY
Review of : Literature review is an opinion of the experts
Literature on the previously published works on a
specific topic
Narrative : A narrative or traditional literature review is a
Literature Review comprehensive, critical and objective analysis
of the current knowledge on a topic.
Argumentative : Examines literature selectively in order to
Literature Review support or refute an argument
Systematic : Require more rigorous and well-defined

Literature Review approach compared to most other types of
literature review
26
Meta-Analysis : Take findings from several studies on the
same subject and analyse these using
standardized statistical procedure.
SUGGESTED READINGS
McGraw Hill, India
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. 7 steps to write a literature review (Re-upload) - Bing video

2. 001 Literature Review in Research Methodology - What is a
Literature Review - Bing video
3. How to DO research? - Literature Review: Research Methodology
for young researchers by M Ahad - Bing video
4. Literature Review - Bing video

1.d) 2. d) 3.a) 4.a) 5.d)
27
UNIT 4
RESEARCH PROBLEM
STRUCTURE
Overview
Learning Objectives
4.1 Research Problem
4.1.1 Sources of Research Problem
4.1.2 Identification of Research Problem
4.1.3 Types of Research Problem
4.1.4 Formulation of Research Problem
4.2 Steps in Formulation of Research Problem
4.3 Criteria for Section of a Good Research Problem
4.4 Evaluation of Research Problem
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The Research problem or question in business research is one of the first
research methodological steps. In business or management, the research
question which the research sets out to answer. Hence, the planning of
research aims to decide the question or issue to be studied, setting the
objectives of the study and determining the means of achieving those
objectives. Moreover, it requires intellectual curiosity, intelligence,
imagination and vision and knowledge of methodology on research. This
unit will give a great insight to the readers on research problems, types,
formulation and evaluation of research problems.
LEARNING OBJECTIVES
• discuss research problem

• identify the research problem
• describe the different types of research problems
4.1 RESEARCH PROBLEM
The first step in the research process consists of problem or question or
opportunity identification. The necessity is properly identified; the
28
research problems cannot be over emphasized. It is slightly said that “a
well-defined problem is half solved”.
A problem does not necessarily mean that something is seriously wrong
with a current situation that needs to be rectified immediately. A problem
could simply indicate an interest in an issue where finding the right
answers might help to improve an existing situation. Thus, research
problems are defined as “a problem as any situation where a gap exists
between the actual and the desirable ideal states”.
In other words, research problems are the choice hypothesis that best
states the objectives of the research study. It is a more specific
management question, which must be answered. A research process that
answers this question provides the manager with the desired information
necessary to make the decision the researcher is encountering.
4.1.1 Sources of Research Problem
The sources from which one may be able to identify research problems or
understand problem awareness are:
a) We critically study books and articles relating to the subject of our
interest.
b) Classroom discussions, seminars, conferences, workshops,
symposiums and out of class exchanges of ideas with fellow
students.
c) Professors also suggest many stimulating problems.
d) Our daily experiences are new learning’s.
e) Field visits, internship training and extension work provide
exposure to practical problems.
f) Discussions with experts, researchers and business executives
will help a researcher to identify useful problems for research.
g) Research on problems also suggests problems for further
research.
h) Sometimes new ideas may strike to news mind like a flash.
4.1.2 Identification of Research Problem
The process of identification of problems for academic research consists
of:
a) The discipline in which one proposes to do research may be
selected, for example, management, commerce, economics,
technology, etc.
b) Demarcating the broad area of the selected subjects, for example,
financial management, working capital management investment
alternatives, work life balance, e-banking services, etc.
29
c) Identifying two or more specific topics in the selected broad area.
This requires a group of branches of the subject as a whole and
awareness of work already done on it.
4.1.3 Types of Research Problem
In social sciences research problems may be classified into three
according to distinct varieties differing in form, content, and mode of
verifications. They are:
a) Empirical problem – when social science researchers answer
questions or problems on the basis of what they come to know
through their sensory organs, these are expressed as empirical
problems. Here, the researchers base their conclusions and findings
on what they perceive or observe or sense in-order to verify, approve
or reject the relationship between two or more variables.
b) Analytical problem – this type of problems is not scientific. These are
questioning whose answers depend on the meaning of the words in
the sentences expressing them. Analytical problems or statements
are merely definitional and not empirical, essentially language and
conceptual problems and not factual and scientific problems.
Answers to such problems depend upon definition of the words in the
sentences that express them.
c) Normative problem – these types of problems are questioning whose
answers depend primarily on value judgments. The value judgments
are statements of what is desirable, preferred, moral, imperative or
obligatory; these may take either an evaluative or prescriptive form.
4.1.4 Formulation of Research Problem
The problem selected for research may initially be a vague topic. It
requires intensive reading of a few selected articles or books in order to
understand the nature of the selected problem. The researcher should
read such selected literatures, think and reflect upon what is read and
digested. The researcher should also discuss with learned experts.
Formulation of research problems means translating and transforming the
selected research problem into a scientifically researchable question. The
problem formulation process involves the following steps:
a) The title should be carefully worded.
b) The problem under study, the native of its elements and their inter
relationship should be identified and structured into a framework.
c) The objectives of the study problem to be answered through the
study.
30
d) When the objectives of the research or the general research
questions have been defined, the formulation moves to the next
level investigative questions.
e) Formulative hypotheses are tentative propositions relating to
investigative questions.
f) Then the formulation process is to define operational concepts
involved in the title, objectives, investigative questions and
hypotheses.
g) The operational definitions specify the measurement parameters
of the variables.
h) Delimiting the scope and dimensions of the study. The purpose of
this delimitation is to avoid confusion and superficiality and
promote clarification and successful completion within time limits
and available resources. The aspects that may be delimited are:
i. The objective of the study
ii. The geographical area to be covered by the study
iii. The reference period and
iv. The magnitude of the study.
4.2 STEPS IN FORMULATION OF RESEARCH PROBLEM
Once the problem has been selected, the same has to be understood
thoroughly and then same has to be reframed into meaningful teams from
an analytical point of view. Some facts involved in formulation of research
problems are:
• Statement of the problem in general way
• Understanding the nature of a problem
• Survey the available literature
• Developing ideas through discussions
• Rephrasing the research problem into a working position
• Technical terms and words and phases
• Basic assumptions and postulates
• Value of the investigation
• Suitability of time period
• Sources of data available
• Scope of investigation and
• Limits of the research problem
4.3 CRITERIA FOR SECTION OF A GOOD RESEARCH PROBLEM
The research problem selected by the researcher should confirm to the
following guidelines:
a) The problem should express a relationship between two or more
variables
31
b) The problem should be related clearly and unambiguously in
question form.
c) The problem should be such as to imply possibilities of empirical
testing.
d) Every research work needs the patronage of a guide on the
approval and sanction of competent authority.
e) The nature and scope of a study will be determined in the light of
levels like Master’s degree, M.Phil degree, Ph.D and D.Lit or D.Sc.
f) The research problems stem from a clear understanding of the
theoretical, empirical and practical aspects of the topic derived
from personal experience and through review of literature.
g) The problem should be sufficiently original.
h) The problem should be interesting for the researcher.
i) The problem should be significant enough and involve an
important principle or practice.
4.4 EVALUATION OF RESEARCH PROBLEM
Before the proposed research problem can be considered appropriate,
several search questions should be raised. All the questions raised must
be related to the problem. When are the following questions answered in
the affirmative? Can the problem be considered a good one?
a) Is the problem researchable?
b) Is the problem significant?
c) Is the problem a new one?
d) Is research on the problem feasible?
e) Am I competent to plan and carry out a study of this type?
f) Is pertinent data accessible?
g) Will I have the necessary financial resources to carry on this
study?
h) Will I have enough time to complete the project?
i) Will I have the courage and determination to pursue my studies in
spite of the difficulties and social hazards that may be involved?
j) Is the researcher generally interested in the problem?
LET US SUM UP
The term research problem refers to a problem as any situation where a
gap exists between the actual and the desirable ideal states. In this unit
had discussed on research problems, types of sources, formulation,
criteria for good research problem and evaluation of research problem.
This unit also gives depth knowledge to the readers on research problem
formulation.
32
CHECK YOUR PROGRESS
1. A research problem is not feasible only when

a) It consists of independent and dependent variables
b) It is researchable
c) It has utility and relevance
d) It is new and adds something to knowledge
2. Research is process of
a) Repeated search for facts.

b) Search for a problem
c) Collecting primary and secondary data
d) Preparing report on a problem.
3. Which is an important feature of a good research plan?
a) A good research design gives minimum experimental error
b) A good research design should be flexible, efficient and
appropriate.
c) A good research design should be economical.
d) All of the above.
4. Formulation of research problem is the
a) First stage in research process
b) Last stage in research process
c) Middle stage in research process
d) All of the above
5. A research problem is feasible only when
a) It is researchable
b) It consists of Independent and dependent variables.
c) When it has utility and relevance.
d) All of the above
GLOSSARY
Research Problem : It is a question that a researcher wants to

answer or a problem that a researcher wants
to solve?
Empirical problem : originating in or based on observation or
experience on empirical data.
33
Analytical : identifying the overriding problem and
problem establishing the causes and effects related to
that problem
Normative : a process to find a legal rules, legal
problem principles, and doctrines primarily on value
judgements.
SUGGESTED READINGS
McGraw Hill, India
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. Business Research Methods |Research: Meaning, Definition,

Importance & Types| AKTU Digital Education - Bing video
2. Selecting a Research Problem - Bing video
3. Chapter-1: Introduction to Business Research Methodology | MBA
Lecture Series | Research Methods - Bing video
1. a) 2.a) 3.d) 4.a) 5.d)
34
UNIT 5
RESEARCH HYPOTHESIS
STRUCTURE
Overview
Learning Objectives
5.1 Research Hypothesis – Meaning
5.1.1 Sources of Hypothesis
5.1.2 Characteristics of a Good Hypothesis
5.1.3 Types of Hypotheses
5.1.4 Functions of Hypothesis
5.2 Rules for Constructing Hypothesis
5.3 Difficulties in Formulation of Hypothesis
5.4 Testing of Hypothesis
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Once the researchers find out the research problem, they can make a
number of guesses. The guesses they make are the hypothesis which
either solves the research problem or guides them in future investigation.
A hypothesis is a proposition – a tentative assumption which a researcher
wants to test for its logical or empirical consequences. Working hypothesis
is more useful when stated in precise and clearly defined terms. It may be
stated that through a hypothesis.
LEARNING OBJECTIVES

• explain the meaning of the term hypothesis
• describe hypothesis formulation
• point out the sources of hypothesis
• discuss the testing of hypothesis
5.1 RESEARCH HYPOTHESIS - MEANING
Hypothesis means a mere assumption or some supposition to be proved

or disproved. In other words, A hypothesis is a preliminary or tentative
explanation or postulate by the researcher of what the researcher
considers the outcome of an investigation will be. According to William C.
35
Emory, hypothesis is defined as, “when propositions are propositions are
combinations of concepts designed by statement that may be judged true
or false, it they refer to observable phenomena”.
According to Fred N. Kerlinger defines, Hypothesis a conjectural
statement of the relation between two or more variables. Hypotheses are
always in declarative sentence form, and they relate either generally or
specially variables to variables.
It is clear, from the above viewpoints highlights the fact that hypothesis a
tentative proposition based on the observation of certain occurrence or
happening.
5.1.1 Sources of Hypothesis
The hypothesis can be derived from various sources. They are:
a) Theory – it gives direction to research by stating what is known.
b) Observation – it can be derived from observation.
c) Analogies – are another source of hypothesis.
d) Personal life and experiences of people.
e) Research findings of other studies.
f) The state of knowledge in any particular field of study.
g) The cultural environment.
h) The sociological, political and economic environment.
i) The continuity of research in a field.
j) Exceptions to accept in a field.
5.1.2 Characteristics of a Good Hypothesis
An acceptable hypothesis should fulfill certain conditions. They are:
• Simple
• Brevity
• Consistent with most know fact,
• Conceptual Clarity
• Empirically testable
• Closest to things observable
• Specific nature
• Related to body of knowledge / theory
• Relevant and available techniques
• State the expected relationship between variables
• Limited in scope
36
5.1.3 Types of Hypotheses
The hypotheses are classified into different ways. They are:
a) Descriptive Hypotheses are propositions that describe the
characteristics of a variable. It may be the size form, distributors, etc.
The variables may be an object, person, institution, organization,
event, etc. For example: The percentage of unemployment among
arts graduates is higher than that of management graduates.
b) Relational Hypothesis – which describes the relationship between
two variables. The relationship suggested may be positive or
negative or causal relationship. For example: The democratic
management style promotes motivation among executives.
c) Causal Hypothesis – When one variable causes an effect on
another variable. The first variable is called the independent variable
and the latter the dependent variable. When dealing with causal
relationships between variables the researcher must consider the
direction is which such relationships flow.
d) Null Hypotheses – States where no difference exists between the
parameter and the statistic being compared to it. For example, there
is no significant relationship between a family’s income level and
expenditure on recreation,
e) Statistical Hypothesis – are quantitative in nature in that they are
numerically measurable. They are derived from a sample. For
example, team A is better than Team B.
f) Complex Hypothesis – aim at testing the existence of logically
derived relationships between empirical formalities. The functions of
many hypotheses are to create tools and problems for further of
such research otherwise very complex areas of investigation.
g) Analytical Hypotheses – are concerned with the relationship
between analytic variables. It occurs at the highest level of
abstraction. These specify the relationship between changes in one
property and specify relationship between changes in one property
and changes in another.
5.1.4 Functions of Hypothesis
The function of hypothesis is.
a) It gives a definite point to the investigation.
b) It guides the direction of the study
c) It specifies the sources of data which shall be studied.
d) It determines the data needs it defines which facts are relevant
and which facts are not relevant.
e) It helps to determine the most appropriate technique of analysis.
37
f) It also contributes to the development of theory.
g) It makes a link between theory and investigation.
h) It suggests the best research design.
5.2 RULES FOR CONSTRUCTING HYPOTHESIS

The rules for construction of hypothesis consist of:
a) Search for variable measurements with the most quantitative
characteristics available.
b) Make the variable scale properties both mutually exclusive and
totally inclusive categories.
c) Always consider alternative operations which might be more
appropriate for a given variable.
d) Analyse the variables through their relationships.
e) Link two or more formal prostitutions.
f) Create new variables by comparing new conceptual frames.
5.3 DIFFICULTIES IN FORMULATION OF HYPOTHESIS

When we formulate the hypothesis, the following difficulties arise:
a) Lack of clear theoretical background

b) Lack of logical background
c) Lack of knowledge on scientific methods
5.4 TESTING OF HYPOTHESIS

A number of steps are involved in testing a hypothesis,
They are:
a) Formulate a hypothesis
b) Set up a suitable significance level
c) Choose a test criterion
d) Compute the statistics and
e) Make decision / inference
LET US SUM UP
Let us sum up this unit, Hypothesis means a mere assumption or
supposition to be proved or disproved. The term hypothesis is defined as
when propositions are formulated and empirically tested, they are called
hypothesis. Propositions are contributions of concepts designed by
statements that may be judged true or false, it they refer to observable
38
phenomena. Besides, we had a discussion on sources, formulation, types
and testing of hypothesis. It will give an in-depth knowledge to the readers.
CHECK YOUR PROGRESS
1. A statement made about a population for testing purpose is called?
a) Statistics
b) Hypothesis
c) Level of Significance
d) Test-Statistic
2. If the assumed hypothesis is tested for rejection considering it to be
true is called?
a) Null Hypothesis
b) Statistical Hypothesis
c) Simple Hypothesis
d) Composite Hypothesis
3. If the null hypothesis is false then which of the following is accepted?
a) Null Hypothesis
b) Positive Hypothesis
c) Negative Hypothesis
d) Alternative Hypothesis
4. The point where the Null Hypothesis gets rejected is called as?
a) Significant Value
b) Rejection Value
c) Acceptance Value
d) Critical Value
5. Type 1 error occurs when?
a) We reject H0 if it is True
b) We reject H0 if it is False
c) We accept H0 if it is True
d) We accept H0 if it is False
GLOSSARY
Hypothesis : is a statement that introduces a research

question and proposes an expected result.
Descriptive : presents the existence, size, type, and
Hypothesis distribution of a variable
39
Relational : describes relationship between two variables
Hypothesis
Null Hypothesis : a hypothesis that states that there is no

relationship between two population
parameters.
SUGGESTED READINGS
McGraw Hill, India
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. Hypothesis in Research Methodology by Dr. Jithin Benedict. - Bing

video
2. || Types of Hypothesis in tamil || research methodology UGC
NET//JRF|| - Bing video
3. Hypothesis in Research | Explained in Tamil | UGC NTA NET
RESEARCH APTITUDE | PAPER I - YouTube
4. HYPOTHESIS | RESEARCH APTITUDE | UGC NET Paper1 |
தமிழ் #hypothesisintamil#typesofhypothesisintamil - YouTube
1.b) 2.a) 3.d) 4.d) 5.a)
40
BLOCK 2
SAMPLING DESIGN & TECHNIQUES
UNIT 6 : RESEARCH DESIGN
UNIT 7 : SAMPLING TECHNIQUES
UNIT 8 : SCALING TECHNIQUES
41
UNIT 6
RESEARCH DESIGN
STRUCTURE
Overview
Learning Objectives
6.1 Research design
6.1.1 Importance of Research Design
6.1.2 Factors Affecting a Research Design
6.1.3 Essentials of a good Research Design
6.2 Types of Research Design
6.3 Contents of Research Design
6.4 Advantages of Research Design
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The success of any research work involves a goods research design. The
function of a research design is to ensure that the required data is
collected and that it is collected accurately and economically. It provides
the glue that holds the research project together. A design is used to
structure the research together. A design is used to structure the research,
to show how all of the major parts of the research project – samples,
measures, treatments, programs and methods of assignment–work –
work together to try to address the central research questions.
LEARNING OBJECTIVES
• discuss the importance of research design

• explain the importance of research design
• describe the contents of research design
42
6.1 RESEARCH DESIGN
Research design is the arrangement of conditions for collection and
analysis of data in a manner that aims to combines relevance to the
research purpose with economy in procedure.
According to Kerlinger defines, “a research design is a plan, structure and
strategy of investigation so conceived as to obtain answers to research
questions or problems. The plan is the complete scheme or programme
of research. It includes an outline of what the investigator will do from
writing the hypothesis and their operational implications to the final
analysis of data”.
According to Thyer, “defines, “a traditional research design is a blue-print
or detailed plan for how a research study is to be completed
operationalizing variables so they can be measured, selecting a sample
of interest to study, collecting data to be used as, a basics for testing
hypothesis and analyzing the results”.
6.1.1 Importance of Research Design

The preparation of a research plan for a study helps in establishing
direction to the study and in knowing exactly what has to be done and how
and when it has to be done at every stage. It also prescribes the
boundaries of research work and enables the researcher to channel his
energies in the right work, it involves,
• It is useful to prepare an advance plan for collecting and analyzing
the information.
• It helps researchers to organize their ideas in a form.
• It facilitates smooth, effective and economical working of various
research problems.
• It provides an opportunity to critic to evaluate the projected study.
6.1.2 Factors Affecting Research Design
The following factors are greatly affecting the research design:
• Non-availability of sufficient data or information
• Non-availability of sufficient time.
• Lack of resources.
• Lack of knowledge, skill and ability of the researcher.
• Problems in external factors such as industrial sickness, natural
calamities, labour un-rest, etc.
• Fact finding studies always, etc.
43
6.1.3 Essentials of a good Research Design
The essentials of a good research design involve:
• It is a plan that specifies the objectives of the study and the
hypotheses to be tested.
• It is an outline that specifies the sources and types of information
relevant to the research questions.
• It is a blueprint specifying the methods to be adopted for gathering
and analyzing the data
• It is a scheme defining the domain of generalizability, ie, whether
they obtained information can be generalized to a larger population
or to different situations.
6.2 TYPES OF RESEARCH DESIGN
Based on the fundamental objectives or purposes research design can be
classified into the following types:
i. Exploratory research design
ii. Causal research design
iii. Descriptive research design
iv. Experimental research design
v. Conclusive research design
vi. Correlational research design
vii. Field research design
viii. longitudinal research design
ix. Meta-Analysis research design
x. Systematic review design
Exploratory research design – it is characteristied by its lack of structure

and flexibility. This research design is diagnostic in nature. Generally, it is
used for the development of hypothesis regarding potential problems and
opportunities. This type of research provides insight and understanding of
the problems. The exploratory research methods include secondary data
sources, experts’ opinions, surveys, in-depth discussions, case studies
and observation. In most of the times, exploratory research is followed by
conclusive research for more precise analysis and conclusion.
Types and methodologies of Exploratory research
While it may sound a little difficult to research something that has very
little information about it, there are several methods which can help a
researcher figure out the best research design, data collection
methods and choice of subjects. There are two ways in which research
can be conducted, namely primary and secondary. Under these two types,
44
there are multiple methods which can be used by a researcher. The data
gathered from this research can be qualitative or quantitative. Some of
the most widely used research designs include the following:
i. Primary research methods
Primary research is information gathered directly from the subject. It can
be through a group of people or even an individual. Such research can be
carried out directly by the researcher himself or can employ a third party
to conduct it on their behalf. Primary research is specifically carried out to
explore a certain problem which requires in-depth study.
a. Surveys/polls are used to gather information from a predefined
group of respondents. It is one of the most important quantitative
methods. Various types of surveys or polls can be used to explore
opinions, trends, etc. With the advancement in technology, surveys
can now be sent online and can be very easy to access. For instance,
use of a survey app through tablets, laptops, or even mobile phones.
This information is also available to the researcher in real time as
well. Nowadays, most organizations offer short length surveys and
rewards to respondents, in order to achieve higher response rates.
For example: A survey is sent to a given set of audience to
understand their opinions about the size of mobile phones when they
purchase one. Based on such information, an organization can dig
deeper into the topic and make business related decisions.
b. Interviews: While you may get a lot of information from public
sources, sometimes an in-person interview can give in-depth
information on the subject being studied. Such research is
a qualitative research method. An interview with a subject matter
expert can give you meaningful insights that a generalized public
source won’t be able to provide. Interviews are carried out in person
or on the telephone which have open-ended questions to get
meaningful information about the topic.
For example: An interview with an employee can give you more
insights to find out the degree of job satisfaction, or an interview with
a subject matter expert of quantum theory can give you in-depth
information on that topic.
c. Focus groups: Focus groups is yet another widely used method in
exploratory research. In such a method a group of people is chosen
and are allowed to express their insights on the topic that is being
studied. Although, it is important to make sure that while choosing the
individuals in a focus group they should have a common background
and have comparable experiences.
45
For example: A focus group helps research identify the opinions of
consumers if they were to buy a phone. Such research can help the
researcher understand what the consumer value while buying a
phone. It may be screen size, brand value or even the dimensions.
Based on which the organization can understand what consumer are
buying attitudes, consumer opinions, etc.
d. Observations: can be qualitative observation or quantitative
observation. Such research is done to observe a person and draw
the finding from their reaction to certain parameters. In such
research, there is no direct interaction with the subject.
For example: An FMCG company wants to know how it’s consumer
reacts to the new shape of their product. The researcher observes
the customers’ first reaction and collects the data, which is then used
to draw inferences from the collective information.
ii. Secondary research methods
Secondary research is gathering information from previously published
primary research. In such research you gather information from sources
like case studies, magazines, newspapers, books, etc.
a. Online research: In today’s world, this is one of the fastest ways to

gather information on any topic. A lot of data is readily available on
the internet and the researcher can download it whenever he needs
it. An important aspect to be noted for such research is the
genuineness and authenticity of the source websites that the
researcher is gathering the information from.
For example: A researcher needs to find out what is the percentage
of people that prefer a specific brand phone. The researcher just
enters the information he needs in a search engine and gets multiple
links with related information and statistics.
b. Literature research: is one of the most inexpensive methods used
for discovering a hypothesis. There is a tremendous amount of
information available in libraries, online sources, or even commercial
databases. Sources can include newspapers, magazines, books from
libraries, documents from government agencies, specific topic related
articles, literature, Annual reports, published statistics from research
organizations and so on.
However, a few things have to be kept in mind while researching from
these sources. Government agencies have authentic information but
sometimes may come with a nominal cost. Also, research from
educational institutions is generally overlooked, but in fact educational
institutions carry out a greater number of research than any other
entities. Furthermore, commercial sources provide information on
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major topics like political agendas, demographics, financial
information, market trends and information, etc.
For example: A company has low sales. It can be easily explored from
available statistics and market literature if the problem is market
related or organization related or if the topic being studied is regarding
financial situation of the country, then research data can be accessed
through government documents or commercial sources.
c. Case study research: can help a researcher with finding more
information through carefully analyzing existing cases which have
gone through a similar problem. Such analysis is very important and
critical, especially in today’s business world. The researcher just
needs to make sure he analyses the case carefully in regard to all
the variables present in the previous case against his own case. It is
very commonly used by business organizations or social sciences
sector or even in the health sector.
For example: A particular orthopedic surgeon has the highest success
rate for performing knee surgeries. A lot of other hospitals or doctors
have taken up this case to understand and benchmark the method in
which this surgeon does the procedure to increase their success rate.
Steps to conduct exploratory research
• Identify the problem: A researcher identifies the subject of
research, and the problem is addressed by carrying out multiple
methods to answer the questions.
• Create the hypothesis: When the researcher has found out that
there are no prior studies and the problem is not precisely resolved,
the researcher will create a hypothesis based on the questions
obtained while identifying the problem.
• Further research: Once the data has been obtained, the researcher
will continue his study through descriptive investigation. Qualitative
methods are used to further study the subject in detail and find out if
the information is true or not.
Characteristics of Exploratory research
• They are not structured studies
• It is usually low cost, interactive and open-ended.
• It will enable a researcher to answer questions like what is the
problem? What is the purpose of the study? And what topics could
be studied?
• To carry out exploratory research, generally there is no prior
research done or the existing ones do not answer the problem
precisely enough.
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• It is time-consuming research, and it needs patience and has risks
associated with it.
• The researcher will have to go through all the information available
for the particular study he is doing.
• There are no set of rules to carry out the research per se, as they
are flexible, broad and scattered.
• Research needs to have importance or value. If the problem is not
important in the industry the research carried out is ineffective.
• The research should also have a few theories which can support its
findings as that will make it easier for the researcher to assess it and
move ahead in his study
• Such research usually produces qualitative data, however in certain
cases quantitative data can be generalized for a larger sample
through use of surveys and experiments.
Advantages of Exploratory research
• The researcher has a lot of flexibility and can adapt to changes as
the research progresses.
• It is usually low cost.
• It helps lay the foundation of research, which can lead to further
research.
• It enables the researcher to understand at an early stage, if the
topic is worth investing time and resources and if it is worth
pursuing.
• It can assist other researchers to find out possible causes for the
problem, which can be further studied in detail to find out which of
them is the most likely cause for the problem.
Disadvantages of Exploratory research
• Even though it can point you in the right direction towards what is
the answer, it is usually inconclusive.
• The main disadvantage of exploratory research is that they
provide qualitative data. Interpretation of such information can be
judgmental and biased.
• Most of the time, exploratory research involves a smaller sample,
hence the results cannot be accurately interpreted for a
generalized population.
• Many a time, if the data is being collected through secondary
research, then there is a chance of that data being old and not
updated.
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Importance of Exploratory research
Exploratory research is carried out when a topic needs to be understood
in depth, especially if it hasn’t been done before. The goal of such
research is to explore the problem around it and not actually derive a
conclusion from it. Such kind of research will enable a researcher to set a
strong foundation for exploring his ideas, choosing the right research
design and finding variables that actually are important for the analysis.
Most importantly, such research can help organizations or researchers
save up a lot of time and resources, as it will enable the researcher to
know if it is worth pursuing.
i.Causal research design – is associated with experiments on causal
relationships investigating the effect of one or more variables on one or
more outcome variables on one or more outcome variables. This type
of research determines if one variable causes another variable to occur
or change.
The causal designs differ from descriptive designs in their greater
probability of the manipulation of causal researcher trees to determine
if the manipulation of one variable called the independent variable,
affects another variable, called the dependent variable. The causal
methods include natural experimentation, simulation and true
experiments.
The presence of cause cause-and-effect relationships can be confirmed

only if specific causal evidence exists. Causal evidence has three
important components:
a. Temporal sequence. The cause must occur before the effect. For
example, it would not be appropriate to credit the increase in sales
to rebranding efforts if the increase had started before the
rebranding.
b. Concomitant variation. The variation must be systematic between
the two variables. For example, if a company doesn’t change its
employee training and development practices, then changes in
customer satisfaction cannot be caused by employee training and
development.
c. Nonspurious association. Any covariation between a cause and
an effect must be true and not simply due to other variables. In other
words, there should be no a ‘third’ factor that relates to both, cause,
as well as, effect.
The table below compares the main characteristics of causal research to
exploratory and descriptive research designs:
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Examples of Causal Research Design
The following are examples of research objectives for causal research
design:
• To assess the impacts of foreign direct investment on the levels of
economic growth in Taiwan
• To analyse the effects of re-branding initiatives on the levels of
customer loyalty
• To identify the nature of impact of work process re-engineering on
the levels of employee motivation
Advantages of Causal Research

• Causal studies may play an instrumental role in terms of identifying
reasons behind a wide range of processes, as well as, assessing
the impacts of changes on existing norms, processes etc.
• Causal studies usually offer the advantages of replication if
necessity arises
• This type of studies is associated with greater levels of internal
validity due to systematic selection of subjects
Disadvantages of Causal Research
• Coincidences in events may be perceived as cause-and-effect

relationships. For example, Punxatawney Phil was able to forecast
the duration of winter for five consecutive years, nevertheless, it is
just a rodent without intellect and forecasting powers, i.e. it was a
coincidence.
• It can be difficult to reach appropriate conclusions on the basis of
causal research findings. This is due to the impact of a wide range
of factors and variables in social environment. In other words, while
casualty can be inferred, it cannot be proved with a high level of
certainty.
• It certain cases, while correlation between two variables can be
effectively established; identifying which variable is a cause and
which one is the impact can be a difficult task to accomplish.
ii.Descriptive Research Design – It is characterised to describe the
phenomena while trying to determine the association among variables. It
also seeks to predict future phenomena. In this type of study there is no
clear hypothesis are actually more exploratory than conclusive. To be of
maximum value a descriptive study must collect data for a definite
purpose. Descriptive research includes case study methods, statistical
methods, observation methods, and survey method.
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Comparison Causal Exploratory Descriptive
research research research
Amount of Clearly defined Highly Partially
uncertainty ambiguous defined
characterizing
decision
situation
Key research Research Research Research
statement hypotheses question question
When Later stages of Early stage of Later stages of
conducted? decision decision decision
making making making
Usual research Highly Unstructured Structured
approach structured
Examples ‘Will consumers
buy more ‘Our sales are ‘What kind of
products in a declining for no people
blue package?’ apparent patronize our
reason’ stores
‘What kinds of compared to
new products our primary
are fast-food competitor?’
consumers
interested in?’ ‘What product
features are the
most important
to our
customers?’
iii.Experimental Design – It is characteristied to a blueprint of the procedure

that enables the researcher to test hypothesis by reaching valid
conclusions about relationships between independent and dependent
variables. It refers to the conceptual framework within which the
experiment is conducted. It includes methodological experiment is
conducted. It includes methodological experiments, pilot study, heuristic
study, fact finding, boundary, simulation, homological, theoretical,
illustrative, it also involves both informal experimental design and formal
experimental design.
The informal experimental design includes after only design, after only
with control design, before and after without control design, before and
after with control design and export facts design.
The formal experimental design includes completely randomised design,
randomised block design, Latin squares design and factorial designs.
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Types of experimental research design
The classic experimental design definition is, “The methods used to collect
data in experimental studies.”
There are three primary types of experimental design:
a) Pre-experimental research design
b) True experimental research design
c) Quasi-experimental research design
The way you classify research subjects, based on conditions or groups,
determines the type of research design you should use.
a. Pre-experimental research design: A group, or various groups, are
kept under observation after implementing factors of cause and effect.
You’ll conduct this research to understand whether further investigation is
necessary for these particular groups.
You can break down pre-experimental research further in three types:
i.One-shot Case Study Research Design
ii.One-group Pretest-posttest Research Design

iii.Static-group Comparison
b. True experimental research design: True experimental research
relies on statistical analysis to prove or disprove a hypothesis, making it
the most accurate form of research. Of the types of experimental design,
only true design can establish a cause-effect relationship within a group.
In a true experiment, three factors need to be satisfied:
There is a Control Group, which won’t be subject to changes, and an
Experimental Group, which will experience the changed variables. A
variable which can be manipulated by the researcher.
c. Quasi-experimental research design: The word “Quasi” indicates
similarity. A quasi-experimental design is similar to experimental, but it is
not the same. The difference between the two is the assignment of a
control group. In this research, an independent variable is manipulated,
but the participants of a group are not randomly assigned. Quasi-research
is used in field settings where random assignment is either irrelevant or
not required.
Advantages of experimental research
• It’s vital to test new ideas or theories. Why put time, effort, and
funding into something that may not work?
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• Experimental research allows you to test your idea in a controlled
environment before taking it to market. It also provides the best
method to test your theory, thanks to the following advantages:
• Researchers have a stronger hold over variables to obtain desired
results.
• The subject or industry does not impact the effectiveness of
experimental research. Any industry can implement it for research
purposes.
• The results are specific.
• After analyzing the results, you can apply your findings to similar
ideas or situations.
• You can identify the cause and effect of a hypothesis. Researchers
can further analyze this relationship to determine more in-depth
ideas.
• Experimental research makes an ideal starting point. The data you
collect is a foundation on which to build more ideas and conduct
more research.
iv.Conclusive Research Design – this type of research design is generally
more formal and structured as compared to exploratory research, it is
used to provide information for the evaluation of alternative courses of
action. Conclusive research design includes descriptive research design,
longitudinal, case studies, causal and experimental research design.
The table below illustrates the main differences between conclusive and
exploratory research design:
Factor Conclusive Exploratory
Objectives To test hypothesis and To get insights and

relationships understanding
Information needs a Information needs are

clearly defined loosely defined Research
Research process is process is unstructured and
Characteristics formal and structured flexible Small, non-
Large representative representative sample
sample Data analysis is Primary data analysis is
quantitative qualitative
Findings Conclusive Only tentative
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Outcome Findings used as input Generally followed by
to decision making further exploratory
conclusive research
It has to be noted that “conclusive research is more likely to use statistical

tests, advanced analytical techniques, and larger sample sizes, compared
with exploratory studies. Conclusive research is more likely to use
quantitative, rather than qualitative techniques. Conclusive research is
helpful in providing a reliable or representative picture of the population
through the application of valid research instrument.
Conclusive research design can be divided into two
categories: descriptive research and causal research.
Descriptive research is used to describe some functions or characteristics
of phenomenon and can be further divided into the following groups:
• Case study.
• Case series study.

• Cross-sectional study.
• Longitudinal study.
• Retrospective study.
Causal research, on the other hand, is used to research cause and affect
relationships. Two popular research methods for causal studies are
experimental and quasi-experimental studies.
vi. Correlational research design: is a type of non-experimental
research method in which a researcher measures two variables,
understands and assesses the statistical relationship between them with
no influence from any extraneous variable. Our minds can do some
brilliant things. For example, it can memorize the jingle of a pizza truck.
The louder the jingle, the closer the pizza truck is to us. Who taught us
that? Nobody! We relied on our understanding and came to a conclusion.
We don’t stop there, do we? If there are multiple pizza trucks in the area
and each one has a different jingle, we would memorize it all and relate
the jingle to its pizza truck. This is what correlational research precisely
is, establishing a relationship between two variables, “jingle” and “distance
of the truck” in this particular example. The correlational study is looking
for variables that seem to interact with each other. When you see one
variable changing, you have a fair idea of how the other variable will
change.
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The correlation coefficient shows the correlation between two variables (A
correlation coefficient is a statistical measure that calculates the strength
of the relationship between two variables), a value measured between -1
and +1. When the correlation coefficient is close to +1, there is a positive
correlation between the two variables. If the value is close to -1, there is
a negative correlation between the two variables. When the value is close
to zero, then there is no relationship between the two variables.
Let us take an example to understand correlational research.
Consider hypothetically; a researcher is studying a correlation between
cancer and marriage. In this study, there are two variables: disease and
marriage. Let us say marriage has a negative association with cancer.
This means that married people are less likely to develop cancer.
However, this doesn’t necessarily mean that marriage directly avoids
cancer. In correlational research, it is not possible to establish the fact,
what causes what. It is a misconception that a correlational study involves
two quantitative variables. However, the reality is two variables are
measured, but neither is changed. This is true independent of whether
the variables are quantitative or categorical.
Types of correlational research

Mainly three types of correlational research have been identified:
a. Positive correlation: A positive relationship between two variables is
when an increase in one variable leads to a rise in the other variable. A
decrease in one variable will see a reduction in the other variable. For
example, the amount of money a person has might positively correlate
with the number of cars the person owns.
b. Negative correlation: A negative correlation is quite literally the
opposite of a positive relationship. If there is an increase in one variable,
the second variable will show a decrease and vice versa.
For example, being educated might negatively correlate with the crime
rate when an increase in one variable leads to a decrease in another and
vice versa. If the level of education in a country is improved, it can lower
crime rates. Please note that this doesn’t mean that lack of education
leads to crimes. It only means that a lack of education and crime is
believed to have a common reason – poverty.
c. No correlation: In this third type, there is no correlation between the
two variables. A change in one variable may not necessarily see a
difference in the other variable. For example, being a millionaire and
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happiness is not correlated. An increase in money doesn’t lead to
happiness.
Characteristics of correlational research
Correlational research has three main characteristics. They are:
• Non-experimental: Correlational study is non-experimental. It
means that researchers need not manipulate variables with a
scientific methodology to either agree or disagree with a hypothesis.
The researcher only measures and observes the relationship
between the variables, without altering them or subjecting them to
external conditioning.
• Backward-looking: Correlational research only looks back at
historical data and observes events in the past. Researchers use it
to measure and spot historical patterns between two variables. A
correlational study may show a positive relationship between two
variables, but this can change in the future.
• Dynamic: The patterns between two variables from correlational

research are never constant and are always changing. Two
variables having a negative correlation research in the past can
have a positive correlation relationship in the future due to various
factors.
vii. Field research design: is defined as a qualitative method of data
collection that aims to observe, interact and understand people while they
are in a natural environment. For example, nature conservationists
observe behavior of animals in their natural surroundings and the way
they react to certain scenarios. In the same way, social scientists
conducting field research may conduct interviews or observe people from
a distance to understand how they behave in a social environment and
how they react to situations around them.
Field research encompasses a diverse range of social research
methods including direct observation, limited participation, analysis of
documents and other information, informal interviews, surveys etc.
Although field research is generally characterized as qualitative research,
it often involves multiple aspects of quantitative research in it.
Field research typically begins in a specific setting although the end
objective of the study is to observe and analyze the specific behavior of a
subject in that setting. The cause and effect of a certain behavior, though,
is tough to analyze due to presence of multiple variables in a natural
environment. Most of the data collection is based not entirely on cause
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and effect but mostly on correlation. While field research looks for
correlation, the small sample size makes it difficult to establish a causal
relationship between two or more variables.
Methods of Field Research
Field research is typically conducted in 5 distinctive methods. They are:
• Direct Observation: In this method, the data is collected via
an observational method or subjects in a natural environment. In this
method, the behavior or outcome of situation is not interfered in any
way by the researcher. The advantage of direct observation is that it
offers contextual data on people, situations, interactions and the
surroundings. This method of field research is widely used in a public
setting or environment but not in a private environment as it raises
an ethical dilemma.
• Participant Observation: In this method of field research, the
researcher is deeply involved in the research process, not just purely
as an observer, but also as a participant. This method too is
conducted in a natural environment, but the only difference is the
researcher gets involved in the discussions and can mould the
direction of the discussions. In this method, researchers live in a
comfortable environment with the participants of the research, to
make them comfortable and open up to in-depth discussions.
• Ethnography: Ethnography is an expanded observation of social
research and social perspective and the cultural values of an entire
social setting. In ethnography, entire communities are observed
objectively. For example, if a researcher would like to understand
how an Amazon tribe lives their life and operates, he/she may
choose to observe them or live amongst them and silently observe
their day-to-day behavior.
• Qualitative Interviews: Qualitative interviews are close-ended
questions that are asked directly to the research subjects. The
qualitative interviews could be either informal and conversational,
semi-structured, standardized and open-ended or a mix of all the
above three. This provides a wealth of data to the researcher that
they can sort through. This also helps collect relational data. This
method of field research can use a mix of one-on-one
interviews, focus groups and text analysis.
• Case Study: A case study research is an in-depth analysis of a

person, situation or event. This method may look difficult to operate,
however, it is one of the simplest ways of conducting research as it
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involves a deep dive and thorough understanding the data collection
methods and inferring the data.
Steps in Conducting Field Research
Due to the nature of field research, the magnitude of timelines and costs
involved, field research can be very tough to plan, implement and
measure. Some basic steps in the management of field research are:
• Build the Right Team: To be able to conduct field research, having
the right team is important. The role of the researcher and any
ancillary team members is very important and defining the tasks they
have to carry out with defined relevant milestones is important. It is
important that the upper management too is vested in the field
research for its success.
• Recruiting People for the Study: The success of the field research
depends on the people that the study is being conducted on.
Using sampling methods, it is important to derive the people that will
be a part of the study.
• Data Collection Methodology: As spoken in length about above,
data collection methods for field research are varied. They could be
a mix of surveys, interviews, case studies and observation. All these
methods have to be chalked out and the milestones for each method
too have to be chalked out at the outset. For example, in the case of
a survey, the survey design is important that it is created and tested
even before the research begins.
• Site Visit: A site visit is important to the success of the field
research, and it is always conducted outside of traditional locations
and in the actual natural environment of the respondent/s. Hence,
planning a site visit along with the methods of data collection is
important.
• Data Analysis: Analysis of the data that is collected is important to
validate the premise of the field research and decide the outcome of
the field research.
• Communicating Results: Once the data is analyzed, it is important
to communicate the results to the stakeholders of the research so
that it could be actioned upon.
Field Research Notes
Keeping an ethnographic record is very important in conducting field
research. Field notes make up one of the most important aspects of the
ethnographic record. The process of field notes begins as the researcher
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is involved in the observational research process that is to be written down
later.
Types of Field Research Notes
The four different kinds of field notes are:
• Job Notes: This method of taking notes is while the researcher is in
the study. This could be in close proximity and in open sight with the
subject in study. The notes here are short, concise and in condensed
form that can be built on by the researcher later. Most researchers
do not prefer this method though due to the fear of feeling that the
respondent may not take them seriously.
• Field Notes Proper: These notes are to be expanded on immediately
after the completion of events. The notes have to be detailed and
the words have to be as close to possible as the subject being
studied.
• Methodological Notes: These notes contain methods on the
research methods used by the researcher, any new
proposed research methods and the way to monitor their progress.
Methodological notes can be kept with field notes or filed separately
but they find their way to the end report of a study.
• Journals and Diaries: This method of field notes is an insight into the
life of the researcher. This tracks all aspects of the researcher’s life
and helps eliminate the Halo effect or any bias that may have
cropped up during the field research.
Reasons to Conduct Field Research
Field research has been commonly used in the 20th century in the social
sciences. But in general, it takes a lot of time to conduct and complete, is
expensive and in a lot of cases invasive. So why then is this commonly
used and is preferred by researchers to validate data? We look at 4 major
reasons:
• Overcoming lack of data: Field research resolves the major issue of
gaps in data. Very often, there is limited to no data about a topic in
study, especially in a specific environment. The problem might be
known or suspected but there is no way to validate this
without primary research and data. Conducting field research helps
not only plug-in gaps in data but collect supporting material and
hence is a preferred research method of researchers.
• Understanding context of the study: In many cases, the data

collected is adequate, but field research is still conducted. This helps
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gain insight into the existing data. For example, if the data states that
horses from a stable farm generally win races because the horses
are pedigreed, and the stable owner hires the best jockeys. But
conducting field research can throw light into other factors that
influence the success like quality of fodder and care provided and
conducive weather conditions.
• Increasing the quality of data: Since this research method uses more
than one tool to collect data, the data is of higher quality. Inferences
can be made from the data collected and can be statistically
analyzed via the triangulation of data.
• Collecting ancillary data: Field research puts the researchers in a
position of localized thinking which opens them new lines of thinking.
This can help collect data that the study didn’t account to collect.
Advantages of Field Research
The advantages of field research are:
• It is conducted in a real-world and natural environment where there

is no tampering of variables, and the environment is not doctored.
• Due to the study being conducted in a comfortable environment,
data can be collected even about ancillary topics.
• The researcher gains a deep understanding into the research
subjects due to the proximity to them and hence the research is
extensive, thorough and accurate.
Disadvantages of Field Research
The disadvantages of field research are:
• The studies are expensive and time-consuming and can take years
to complete.
• It is very difficult for the researcher to distance themselves from a
bias in the research study.
• The notes have to be exactly what the researcher says but the
nomenclature is very tough to follow.
• It is an interpretive method, and this is subjective and entirely
dependent on the ability of the researcher.
• In this method, it is impossible to control external variables, and this
constantly alters the nature of the research.
viii. longitudinal research design: is research conducted over an
extended period of time. It is mostly used in medical research and other
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areas like psychology or sociology. When using this method, a
longitudinal survey can pay off with actionable insights when you have the
time to engage in a long-term research project. Longitudinal studies often
use surveys to collect data that is either qualitative or quantitative.
Additionally, in a longitudinal study, a survey creator does not interfere
with survey participants. Instead, the survey creator distributes
questionnaires over time to observe changes in participants, behaviors,
or attitudes. Many medical studies are longitudinal; researchers note and
collect data from the same subjects over what can be many years.
Types of longitudinal studies
Longitudinal studies are versatile, repeatable, and able to account for
quantitative and qualitative data. Consider the three major types of
longitudinal studies for future research:
a. Panel study: A panel survey involves a sample of people from a more
significant population and is conducted at specified intervals for a more
extended period. One of the panel study’s essential features is that
researchers collect data from the same sample at different points in time.
Most panel studies are designed for quantitative analysis, though they
may also be used to collect qualitative data and analysis.
b. Cohort Study: A cohort study samples a cohort (a group of people
who typically experience the same event at a given point in time). Medical
researchers tend to conduct cohort studies. Some might consider clinical
trials similar to cohort studies. In cohort studies, researchers merely
observe participants without intervention, unlike clinical trials in which
participants undergo tests.
c. Retrospective study: A retrospective study uses already existing
data, collected during previously conducted research with similar
methodology and variables. While doing a retrospective study, the
researcher uses an administrative database, pre-existing medical
records, or one-to-one interviews.
ix. Meta-Analysis Research design: A subset of systematic reviews; a
method for systematically combining pertinent qualitative and quantitative
study data from several selected studies to develop a single conclusion
that has greater statistical power. This conclusion is statistically stronger
than the analysis of any single study, due to increased numbers of
subjects, greater diversity among subjects, or accumulated effects and
results.
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Meta-analysis would be used for the following purposes:
• To establish statistical significance with studies that have

conflicting results
• To develop a more correct estimate of effect magnitude
• To provide a more complex analysis of harms, safety data, and

benefits
• To examine subgroups with individual numbers that are not
statistically significant
• If the individual studies utilized randomized controlled trials (RCT),
combining several selected RCT results would be the highest-level
of evidence on the evidence hierarchy, followed by systematic
reviews, which analyze all available studies on a topic.
Advantages
• Greater statistical power
• Confirmatory data analysis
• Greater ability to extrapolate to general population affected
• Considered an evidence-based resource
Disadvantages
• Difficult and time consuming to identify appropriate studies
• Not all studies provide adequate data for inclusion and analysis
• Requires advanced statistical techniques
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• Heterogeneity of study populations
x. Systematic review design is a study of studies. It attempts to collect
all existing evidence on a specific topic in order to answer a specific
research question. Authors create criteria for deciding on which evidence
is included or excluded before starting the systematic review. This helps
reduce the risk of bias and makes its findings more reliable.
Systematic reviews should:
• clearly state objectives with an explicit and reproducible
methodology.
• attempt to identify all studies that meet the eligibility criteria through
a detailed search strategy.
• assess the validity of the findings of the included studies; and
• synthesize the studies' findings in a systematic way.
6.4 CONTENTS OF RESEARCH DESIGN
The content of the research plan consists of:
• Introduction of the research plan

• Statement of research problem
• Review of previous literature
• Scope
• Objectives of study
• Conceptual framework of the study
• Hypothesis of the study
• Operational definition of concepts
• Significance of the study
• Geographical jurisdiction of the study
• Reference period
• Methodology
• Sampling plan and size
• Tools of data collection
• Chapter scheme
• Time required for the study and
• Estimation of expected cost of the project.
6.5 ADVANTAGES OF RESEARCH DESIGN
The preparation of research design has the following advantages:
• Research design helps to save a lot of researchers’ time
• Research design enables resource planning procurement in sight
time
63
• Research design directs the researcher to execute research work
systematically.
• Research design helps better documentation of research activities
• Research design builds up confidence in the researcher
• Research design gives satisfaction to the researcher at the
completion of every stage of the research work
• Research design ensures to complete the research work in time.
LET US SUM UP
Let us sum up, this unit research design is the arrangement of condition
for collection and analysis of data in a manner that aims to combine
relevance to the research purpose with economy. Moreover, we have
discussed the importance, characteristics, contents, advantages and
types of research design also. All these steps are to be put on the research
work to avoid ambiguity at a later stage.
CHECK YOUR PROGRESS

1. _______research is based on the measurement of quantity or
amount.
a) Qualitative
b) Descriptive
c) Quantitative
d) Numerical
2. ______ describes the present state of affairs as it exists without
having any control over variables.
a) Analytical research
b) Descriptive research
c) Applied research
d) Distinctive research
3. In the _______research, the researcher has to use facts or
information already available.
a) Analytical
b) Descriptive
c) Applied
d) Distinctive
4. ______ is data-based, coming up with conclusions that are
capable of being verified, by observation or by experiment.
a) Contextual research
b) Conceptual research
c) Ideal research
d) Empirical research
64
5. Research design is a _________for conducting the marketing
research project.
a) strategy
b) framework
c) blueprint
d) both B & C
GLOSSARY
Research design : the framework of market research methods

and techniques that are chosen by a researcher.
:is used when researchers are trying to identify
Causal research
the cause-and-effect relationship between two
design
variables.
:the process of carrying out research in an
Experimental
objective and controlled fashion so that
Research design
precision is maximized and specific conclusions
can be drawn regarding a hypothesis statement
: aims to obtain information to systematically
Descriptive Research
describe a phenomenon, situation, or population
design
SUGGESTED READINGS
1. Arora, P.N. & S. Arora, (2007) ,Statistics for Management, latest
2. Dwiedi, R., (2011), Research Methods in Behaviour Science,
House, Mumbai.
5. Panneerselvam, R., (2010), Research Methodology, latest Edition,
6. Vohra, N.D., (2017) Business Statistics, latest Edition, McGraw
Hill, New Delhi,
McGraw Hill, India
India
65
9. Mukul Gupta & Deepa Gupta (2013), Research Methodology,
10. Wayne l Winston,(2013), Excel Data Analysis and Business
WEB RESOURCES
1. Research design in Tamil - Part 1 - Bing video
2. Research design in Tamil - part 2 - Bing video
3. || Research methodology || Variables and their types in Tamil || -
YouTube
4. Research Design explained in tamil | Smart Biology Tricks |
Research methodology - Bing video
1. c) 2. b) 3. a) 4.d) 5. d)
66
UNIT 7
SAMPLING TECHNIQUES
STRUCTURE
Overview
Learning Objectives
7.1 Sample and Sampling
7.1.1 Sampling Process
7.1.2 Essentials of a Good Sampling
7.1.3 Criteria for Selection of Sampling Technique
7.2 Methods of sampling
7.2.1 Probability / Random Sampling
7.2.2 Non-Probability / Non-Random Sampling
7.3 Sampling Error
7.3.1 Causes of Sampling Error
7.3.2 Methods of Reducing Sampling Error
7.3.3 Non-Sampling Errors
7.3.4 Causes of Non-Sampling Error
7.4 Limitations of Sampling Techniques
7.5 Sample Size
7.5.1 Factors Deciding Sample Size
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Sampling is an important concept that we practice in our everyday life. We
submit to blood test as a part of physical examination since few drops we
surrender can give a lot of information about our health. Likewise, a
teacher asks a few students some questions to test whether the students
are well informed in a particular subject or not. In the morning we test the
warmth of our coffee by taking a sip. Sampling involves selecting a
relatively small number of elements from a larger defined group of
elements and expecting that the information gathered from the small
group will allow judgments to be made about the larger group. In this unit
we will discuss sampling methods and sampling design in well.
67
LEARNING OBJECTIVES
After studying this unit, you will be able to,
• gain knowledge on concept of sample and sampling
• discuss the types of sampling
• explain the essentials of good sampling
7.1 SAMPLE AND SAMPLING
Sample refers to smaller representation of a large whole. In other words,
sample is the part of the universe which we select for the purpose of
investigation. A sample should exhibit the characteristics of the universe.
It should be a micro some a word which literally means small universe.
The sampling method is the process of learning about the population on
the basis of sample. Sampling may be defined as, “the section of part of
an aggregate or totality on the basis of which a judgment or inference
about the aggregate or totality is made”.
7.1.1 Sampling Process
The sample process consists of seven sequential steps. They are:

a) Define the population – in terms of elements, units, extent or time.
b) Identify sampling frame – representing the elements of
population.
c) Specify the sampling unit – contain one or more population
elements.
d) Specific the sampling method – sampling units are to be selected
is described.
e) Determine the sample size – the number of elements of
population is to be sampled in chosen.
f) Specify the sampling frame – the operational procedures for
selection of the sampling units are selected.
g) Select the sample – the office and field work necessary for the
selection of sample are carried out.
7.1.2 Essentials of a Good Sampling
The important features of a good sampling involve:

a) The sample must possess all the characteristics of the universe or
population.
b) There should remain no bias in selecting a sample.
c) All the items should be independent of each other.
d) Time and quality of the sample should be the same.
e) The regulating conditions should be the same for all the individual
items.
68
f) The sampling needs to be adequate.
g) It should be possible to measure or estimate the sampling error.
h) A good sample should also consist of homogenous items.
7.1.3 Criteria for Selection of Sampling
The guidelines for selection of sampling technique involves:
a) The sample should be true representative of the universe from
where it has been taken.
b) There should remain no bias in selecting a sample.
c) All the items should be independent of each other.
d) Time and quality of the sample should be same.
e) The conditions should be the same for all the individual items.
f) Sampling needs to be adequate.
g) It results of the sample study, in general, should be applicable to
all items of the universe.
7.2 METHODS OF SAMPLING
The various methods of sampling techniques can be grouped into two

broad heads. They are
a) Probability Sampling / Random Sampling Method and
b) Non-Probability Sampling / Non-Random Sampling Method
7.2.1 Probability / Random Sampling
Probability sampling is based on the theory of probability. It is also known
as random sampling. It provides a known non-zero chance of selection for
each population element. Probability sampling should be used when
generalization is the objective of the study, and a greater degree of
accuracy of estimation of population parameters in required. The cost and
time required for probability sampling may be large.
The importance of randomness in sampling needs no emphasis. It is
meant for securing a representative sample. To ensure randomness the
method of selection must be independent of human judgment. There are
three basic procedures.
a) The lottery method

b) The use of table of random numbers and
c) Use of computers
The types of probability sampling are:
a) Simple Random Sampling – the sampling technique gives each
element an equal and independent chance of being selected. An
independent chance means that the draw of one element will not affect
69
the chances of other elements being selected. It is more suitable for a
small homogeneous population.
b) Stratified Random Sampling – it is an improved type of probability
sampling. Under this method, the population is sub-divided into
homogeneous groups or strata and from each stratum, a random
sample in drawn. This method is more suitable for a large
heterogeneous population.
c) Systematic Random Sampling – this method is also called as fixed
interval method. It is an alternative to random selection. It consists of
taking every nth item in the population after a random start with an item
of 1 to k. As the interval between sample units is fixed.
d) Cluster Sampling – refers to random selection of sampling units
consisting of population elements. Each such sampling unit is a cluster
of population elements, then from each selected sampling unit, a sample
population element is drawn by either simple random selection or
stratified random selection.
e) Area Sampling – it is an important form of cluster sampling. In larger
field surveys, clusters consisting of specific geographical areas like
districts, taluks, blocks or villages in a city are randomly drawn. As the
geographical areas are selected as sampling units, such their sampling
is called area sampling.
In other words, divide each of the selected areas into smaller areas of
almost equal size called segments and select randomly a proportionate
number of segments in each sample area and survey all households in
each of the selected segments.
f) Multi-Stage and Sub-Sampling - In a country like India where a nation
is divided into states, states divided into districts, districts divided into
taluks, taluks into towns, towns into villages, area sampling is done on
the basis of the administrative units in multi-stages.
In this method, sampling is carried out in two or more stages. The
population is regarded as being composed of a number of first stage
sampling units. Each of them is made up of number second stage units
and so forth. This is at each stage; a sampling unit is a cluster of the
sampling units of the subsequent stage. First a sample of the first stage
of sampling units is drawn, then from each of the selected first stage
sampling units, a sample of the second stage sampling units is drawn.
The procedure continues down to the final sampling units or population
elements. This method is appropriate where the population is scattered
over a wider geographical area and no frame or list is available for
sampling.
70
Sub-sampling is part of a multi-stage sampling process. In a multistage
sampling, the sampling is second and subsequent stage frame is called
sub-sampling.
g) Random Sampling with probability proportionate size. The procedure
of selecting clusters proportionate to size is widely used. If one primary
cluster has twice as large a population as another, it is given twice the
chance of being selected. If the same number of people is then selected
from each of the selected clusters, the overall probability of any person
will be the same. Thus, this method is a better method for securing a
representative sample of population elements in multistage cluster
sampling.
h) Double Sampling and Multi-phase Sampling – refer to the sub-
section of the final sample from a pre-selected large sample, that
provided information for improving the final selection. When this
procedure is extended to more than two phases of selection, it is then
called multi-phase sampling. It is also known as sequential sampling.
i) Replicated or Inter Penetrating Sampling – involves selection of a
certain number of sub-samples rather than one full sample from a
population. All the sub-samples should be drawn using the same
sampling technique and each is a self-contained and adequate sample
of the population.
7.2.2 Non-Probability / Non-Random Sampling
Non-probability sampling is also known as non-random sampling. It is not
based on the theory of probability. This sampling does not provide a
chance of selection to each population element. The only merits of this
method of sampling are simplicity, convenience and low cost.
The non-probability sampling methods are classified into:
a) Convenience Sampling – it is also known as accidental sampling. It
means selecting sample units in just interviewing people whom we
happen to meet. In other words, selecting the sample whatever
sampling units are conveniently available. It may be used for simple
purposes such as testing ideas or gaining ideas or rough impression
about a subject of interest.
b) Purposive Sampling – This method of sampling is also termed
judgment sampling. It means deliberate selection of sample units that
confirm to some predetermined criteria. It involves selection of cases
which we judge as the most appropriate ones for the given study. This
method is also based on the judgment of the researcher or some
expert. It is appropriate when what is important is the typical and
71
specific relevance of the sampling units to the study and not their
overall representativeness to the population.
c) Quota Sampling – This method of sampling is a form of convenient
sampling involving selection of quota groups of accessible sampling
units by traits such as gender, age, social class, religion, etc, in a
specific proportion, each investigator may be given an assignment of
quota groups specified by the predetermined traits in specific
proportions. Then the investigator selects accessible people,
belonging to these quota groups in the area assigned to him. This
method is used in studies like marketing surveys, opinion polls, and
readership surveys which do not aim at precision but to get quickly
some crude results.
d) Snowball Sampling – This method of sampling is also termed
referral sampling. This method of sampling involves the practice of
identifying and qualifying a set of initial prospective respondents who
can, in turn, help the researcher identify additional samples to be
included. In this method of sampling one respondent refers to other
potential respondents. In other words, snowball sampling refers to the
initial respondents are selected, and subsequent respondents are
selected by referrals or information from the earlier respondents. In
this sampling method first build up a list or a sample of a special
population by using an initial set of its members as informants. Then
the investigator asks each one of them to supply the name of others
to known to them and continue this procedure until he gets an
exhaustive list from which he can draw a sample or make a census
survey.
Snowball sampling is typically used in research situations like the
defined target population is very small and unique, and compiling a
complete list of sampling units is a nearly impossible task.
7.3 SAMPLING ERROR
Sampling survey denotes the study of small proportion of the total
universe and drawing inference about the population, there would
naturally be a certain amount of inaccuracies or errors. Such errors are
known as known as sampling fluctuations or sampling errors. In other
words, the errors which arise due to the use of sampling surveys are
known as sampling errors. The sampling errors are classified into two
types. They are biased errors and unbiased errors.
a) Biased Sampling Errors – are those which arise as results of any
bias or prejudice of the person in selecting a particular sampling
method. As a result of such a selection, some errors are bound to
arise, and they are known as bias sampling errors or cumulative
72
errors or non-compensating errors. Such errors are likely to
increase with an increase in the size of the sample.
b) Un-biased Sampling Errors – arise due to chance differences
between the members of the population included in the sample
and those not included. This error decreases on an average size
of the sample increases. Therefore, such errors are known as non-
cumulative errors or compensating errors. This may arise due to,
faulty process selecting of sample, faculty work during the
collection of information, faculty method of analysis, etc.
7.3.1 Causes of Sampling Error
The causes of sampling error arise due to the following reasons:
a) Selection of faculty process for sample.
b) Faculty work during the collection of data
c) Faculty method of data analysis.
d) Faculty selection of sample.
e) Selection of sample in a haphazard way.
f) Substitution of selected items in the sample by another.
g) Incomplete investigation or information, etc.
7.3.2 Methods of Reducing Sampling Error
The following suggestions could help in reducing bias and improving
sampling designs are:
a) Selection of specific research problem.

b) Made an intensive study, verification and reporting of
methodological biases.
c) Systematic documentation of related research work.
d) Greater investment in enumeration.
e) Effective pre-testing.
f) Use of complementary research methods and
g) Replication.
7.3.3 Non-Sampling Errors
The non-sampling error can occur in any survey, whether it be a complete
enumeration or sampling. Non-sampling errors include bias and mistakes.
Some of the factors responsible for non-sampling errors are enumerated
here. Vague definition of population, vague questionnaire, vague
conception regarding the information desired, inappropriate statistical
unit, inappropriate methods of interview, interview or measurement, error
in data processing operations such as coding, punching, verification,
tabulation, etc errors committed during presentation and printing of
tabulated results. It tends to increase with the sample size and requires it
to be controlled and reduced to a minimum.
73
7.3.4 Causes of Non-Sampling Error
The non-sampling errors are caused due to the following reasons:
a) Errors in sample selection or a portion of relevant population may
be omitted.
b) The responses obtained from the study not related with objects
interviewed.
c) Selection of adequate respondents.
d) Misunderstanding the concepts.
e) Lack of knowledge.
f) Concealment of truth.
g) Poor structuring of the questions.
h) Errors in observation and recording.
7.4 LIMITATIONS OF SAMPLING TECHNIQUES
The limitations of sampling techniques are:
a) Sampling requires a thorough knowledge of sampling methods
and procedures.
b) A complicated sampling plan may require more labour than
complete coverage.
c) It may not be possible to ensure the representativeness of the
sample respondents.
d) Lack of specialized knowledge in selection of sample and
respondents.
e) When the sampling is not possible to collect.
f) When census is incomplete.
g) Misleading conclusions.
7.5 SAMPLE SIZE
The most important problem confronts a researcher at the outset of the
sample. If a large sample, then what is required is chosen, it involves more
cost and time. If a small sample is chosen the results obtained will be
relatively less accurate. So, the size of sample must be optimum in nature.
An optimum sample may be defined as the size of sample which fulfils the
requirements of efficiency, flexibility, representativeness, reliability.
7.5.1 Factors Deciding Sample Size
However, the actual sample size depends on the following factors:
a) The nature of population.
b) Complexity of tabulation.
c) Problems relating to collection of data.
d) Types of sampling.
74
e) The statistics for sample size estimation.
f) The tolerable limit of error in the estimate of the sample compared
to be true value.
LET US SUM UP
Sample is the part of the universe which we select for the purpose of
investigation. Sampling may be defined as, the selection of part of an
aggregate or totality on the basis of which a judgment or inference about
the aggregate or totality is made. The sampling method is the process of
learning about the population on the basis of sample. Sampling errors
which arise due to the use of sampling surveys are known as sampling
errors. The non-sampling errors can occur in any survey whether it be a
complete enumeration or sampling. Non-sampling errors include bias and
mistakes. Optimum sample may be defined as the size of sample which
fulfils the requirements of efficiency, flexibility, representativeness and
reliability. Moreover, we have discussed the types of sampling such as
probability sampling and non-probability, criteria for selection of sample,
methods of reducing sampling error, etc. This will give a very good insight
to the readers.
CHECK YOUR PROGRESS

1. In __________every unit falling after a chosen gap of units is included
in the sample.
a) Interval sampling
b) Simple random sampling
c) Purposive sampling
d) Cluster sampling
2. Division of the entire population into different groups and then selection
of sample on the basis of proportion of each group in the entire population
is called as ___________.
a) Stratified sampling
b) Sequential sampling
c) Cluster sampling
d) Quota sampling
3. A researcher divides a heterogeneous population into homogeneous
groups and then draws samples from each group. Which sampling
technique is the researcher using?
a) Cluster sampling
b) Stratified sampling
c) Non-probability sampling
75
d) Quota sampling
4. What are the various classifications of sampling?
a) Random and purposive
b) Stratified and cluster
c) Probability and non-probability
d) Multi-stage and sequential
5. In ___________, all the units of the universe have an equal chance of
being included in the sample.
a) non-probability sampling
b) Probability sampling
c) Judgment sampling
d) Interval sampling
GLOSSARY
Sample : It is a group of people, objects, or items that are

taken from a larger population for measurement
Sampling : It is the selection of a subset of the population of
interest in a research study
Probability : It refers to the selection of a sample from a

Sampling population, when this selection is based on the
principle of randomization, that is, random
selection or chance.
Cluster : Researchers divide a population into smaller
Sampling groups known as clusters. They then randomly
select among these clusters to form a sample
Convenience : as a method adopted by researchers where they
Sampling collect market research data from a conveniently
available pool of respondents
SUGGESTED READINGS

McGraw Hill, India
76
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. SAMPLING - MEANING, DEFINITION,TYPES, TECHNIQUES in
Tamil - YouTube
2. || RESEARCH METHODOLOGY || Sampling and types in tamil ||
- Bing video
3. Sampling methods shortcut in tamil- UGC NET Paper1 -
YouTube
1.a) 2.d) 3. b) 4. c) 5. b)
77
UNIT 8
SCALING TECHNIQUES
STRUCTURE
Overview
Learning Objectives
8.1 Measurement
8.1.1 Levels of Measurement
8.1.2 Characteristics of Measurement
8.1.3 Techniques of Developing Measurement Tool
8.2 Test of Sound Measurement
8.2.1 Test of Validity
8.2.2 Test of Reliability
8.2.3 Test of Practicability
8.2.4 Test of Accuracy
8.3 Scaling
8.3.1 Scale Classification Bases
8.3.2 Scaling Techniques
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Measurement is the mid-point to the process of obtaining data. The
measurement in a research project is made, is very difficult in determining
whether the project will be success. In this unit deals with measurement,
levels and techniques of developing measurement, tests of a sound
measurement including validity and reliability, sealing, scaling techniques
and classification, etc.
LEARNING OBJECTIVES

• describe the scaling techniques
• illustrate the levels of measurement
• discuss the test of validity and reliability
78
8.1 MEASUREMENT
Measurement refers to the process of associating numbers or symbols to
observations obtained in a research study. These observations could be
qualitative or quantitative. In other words, measurement is the assignment
of numerals to characteristics of objects, persons, states, events, etc. as
per rules.
8.1.1 Levels of Measurement
These are four levels of measurement. They are:
Nominal, Ordinal, Interval and Ratio.
a) Nominal Measurement – is the most elementary method of

measurement which classifies persons, objects, or events into a
member of mutually exclusive categories, on the basis of the
simple presence or absence, applicability or inapplicability,
possession or non-possession of certain property. In other words,
nominal scale is simply a system of assigning number symbols to
events in order to label them. This is hard and have not
measurement which assigns mutually exclusive labels to identity
objects. Thus, the population of a town may be classified,
according to sex, male and females (ie, 1,2 (or) A,B and according
religion, into Hindus, Muslims, Sikhs and Christians and each
category or persons given certain labels either in the form of
numerals (0,1,2,3) or in the form of letter (A,B,C,D).
b) Ordinal measurement – numerals, letters or other symbols are
used to rank objects. This is essentially an advanced form of
categorization. The ordinal scale places events in order, but there
is no attempt to make the intervals of the scale equal in terms of
some rule. In marketing research, particularly consumer-oriented
research relies on this type of data. Their most common use is in
obtaining preference measurements. For example, a consumer or
a sample of experts may be asked to rank preferences for several
brands, flavors or package design. Attitude measures are also
often ordinal in nature.
c) Interval Measurement – represents numerals used to rank
objects in such a way that numerically equal distances on the scale
represent equal distance in the property being measured. For
example, if we are measuring the achievements of three students
A,B, and C on an interval scale and obtain the values
79
1,4,5 respectively as shown below;
A B C
0 1 2 3 4 5 6
d) Ratio Measurement – have an obsolete or true zero of
measurement. A true zero means that the object measuring zero
proposes none of the property in question. Height and weight are
obvious examples, with a ratio measurement; the comparison
between ratios of the absolute magnitude of the numbers becomes
possible. So, all descriptive measures and inferential techniques are
applicable to ratio-measured data.
8.1.2 Characteristics of Measurement
The characteristic of measurement involves,
a) The stable characteristics of an object or event. For example, the
respondent’s tendency to give only favorable responses
independent of his true feelings.
b) The short-term characteristics of the object, for example health,
hunger, fatigue, etc.
c) Situational characteristics – for example the present or absence of
some person where the measurement is taken.
d) Characteristics of the measurement process – for example sex,
age, dress code, etc.
e) Characteristics of response process, for example mistakes caused
by checking to wrong response.
f) Characteristics of the analysis – for example, mistakes caused by
wrong coding, tabulating etc.
8.1.3 Techniques of Developing Measurement Tool
The technique of developing measurement tools involves a four-stage
process, consisting of
a) Concept development
b) Specification of concept dimensions
c) Selection of indicators and
d) Formation of index
8.2 TEST OF SOUND MEASUREMENT

The test of a good measurement must meet the test of validity, reliability,
practicality and accuracy. They are discussed one by one:
80
8.2.1 Test of Validity
Validity refers to the extent to which a test measures what we actually
measure what we actually wish to measure. Two forms of validity are
usually mentioned in research literature, namely external validity and
internal validity.
a) External validity of research findings is their generalizability to
populations, settings, treatment variables and measurement
variables.
b) Internal validity of a research design is its ability to measure what
it aims to measure. We shall deal with this validity only in the
present chapter.
Validity is the extent to which differences found with a measuring
instrument reflect true difference among these being tested. But one can
certainly consider three types of validity in this connection, they are
1) Content Validity – is the extent to which a measuring instrument
provides adequate coverage of the topic understudy. If the instrument
contains a representative sample of the universe, the content validity
is good. Its determination is primarily judgment and intuitive. It can
also be determined by using a panel of people who shall judge how
well the measuring instrument meets the standards.
2) Criterion – related validity – relates to our ability to predict some
outcome or estimate the existence of some current condition. This
form of validity reflects the success of measures used for some
empirical estimating purpose it must poses the qualities such as
relevance, freedom from bias, reliability and availability.
3) Construct Validity – is the most complex and abstract. A measure
is said to possess construct validity to the degree that it conforms to
predicted correlations with other critical propositions. Construct
validity is the degree to which scores of a test can be amounted for by
the explanatory constructs of a sound theory. For determining
construct validity, we associate a set of other propositions with the
results received from using our measurement instrument. If the
measurement of our devised scale correlates in a predicated way with
these other propositions, we can conclude that there is some construct
validity.
If the above – said criteria and tests are met with, we may finalise that our
measuring instrument is valid and will result in correct measurement.
8.2.2 Test of Reliability
Test of Reliability – is another important test of sound measurement. A
measuring instrument is reliable if it provides consistent results. A reliable
81
measuring instrument does contribute to validity, but a reliable instrument
need not be a valid instrument. According to reliability is not as valuable
as validity, but it is easier to assess reliability in comparison to validity. If
the quality of reliability is satisfied by an instrument, then while using it we
can be confident that the transient and situational factors are not inferring.
There are two aspects of reliability namely stability and equivalence.
The stability aspect is concerned with securing consistent results with
repeated measurements of the same person and in the same
measurement. We usually determine the degree of stability by comparing
the results of repeated measurements.
The equivalence aspect considers how much error may get introduced by
different investigators or different samples of the items being studied. A
good way to test the equivalence of measurements by two investigators
is to compare their observations of the same events. The equivalence
aspect can be improved in the following two ways. They are:
a) By standardizing the conditions under which the measurement

takes place.
b) By carefully designed directors for measurement with no variation
from group to group, by using trained and motivated people to
conduct the research.
8.2.3 Test of Practicability
Test to Practicability refers to judging the characteristics of a measuring

instrument that can be judged in terms of economy, convenience and
interpretability. According to the operational point of view the measuring
instrument ought to be practical. The economic consideration suggests
that some trade-off is needed between the ideal research project and
which budget can be affordable. The convenience consideration suggests
that the measuring instrument should be easy to administer. So, it requires
proper layout of the measuring instrument. Interpretability consideration is
especially important when people other than the designers of the test are
to interpret the results.
8.2.4 Test of Accuracy
The characteristics of a accuracy of a measurement scale means it should
be a true representative of the observation of underlying characteristics
for example, measuring with an ‘inch’ scale will provide accurate value
only up to one-eighth of an inch, while measuring with ‘cm’ scale will
provide more accurate value.
82
8.3 SCALING
Scaling describes the procedure of assigning numbers to various degrees
of opinion, attitude and other concepts. This can be done in two ways
namely,
a) Making judgment about some characteristics of an individual and
placing him directly on a scale that has been defined in-terms of
that characteristics and
b) Considering questionnaires in such a way that the score of
individual’s responses assigns him a place on a scale.
It may be stated that scale is a continuum, consisting of the highest point
and the lowest point along with several intermediate points between these
two extreme points. These scale-point positions are so related to each
other that when the first point happens to be the highest point, the second
point indicates a higher degree in terms of a given characteristics as
compared to third point and the third point indicates a higher degree as
compared to the fourth point and so on.
8.3.1 Scale Classification Bases
The number assigning procedure, or the scaling procedures may be
broadly classified on the following base:
a) Subject Orientation – this scale may be designed to measure
characteristics of the respondent who completes it or to judge the
stimulus object which is presented to the respondent.
b) Response Form – this type of scale is classified into categorical
and comparative. Categorical scales are also known as rating
scales. Comparative scales, which are also known as rating
scales, the respondent is asked to compare two or more objects.
c) Degree of Subjectivity – under this base the scale data may be
based on whether we measure subjective personal preferences or
simply makes non-preference judgments.
d) Scale Properties – considering the scale properties, one may
classify the scales as nominal, ordinal interval and ratio scales.
(Refer to the previous pages)
e) Number of Dimensions – under this basis, the scales can be
classified as uni-dimensional and multi-dimensional scales. On the
uni-dimensional scale, we measure only one attribute to the
respondent or object. But the multi-dimensional scaling recognizes
that an object might be described better by using the concept of
an attribute space of number of dimensions.
f) Scale Constriction Techniques – the following five techniques
are used to develop the scales:
83
i. Arbitrary approach – is an approach where scale is developed on ad
hoc basis.
ii. Consensus approach – consists of a panel of judges evaluate the
items chosen for inclusion.
iii. Item Analysis Approach – consists of a number of individual items are
developed into test which is given to a group of respondents. After
administering the test, the total scores are calculated for everyone.
iv. Cumulative Scales – are chosen on the basis of their confirming to
some ranking of items with ascending and descending discriminating
power.
v. Factor Scales – are constructed on the basis of inter correlations of
items which indicate that a common factor accounts for the
relationship between items. This relationship is typically measured
through factor analysis tests.
8.3.2 Scaling Techniques
Important scaling techniques are often used in the context of research
especially in context of social and business research methods. Attitude
can be defined as the mental state of a consumer. In marketing this can
be perceived as a consumer’s predisposition to respond to a product or
service. There are various ways to represent a respondent with a
continuum of numbered categories that represent the range of possible
attitude judgment. The types of scales in research are:
Single Item Scale – under this single itemized category scale is most
widely used by researchers. This category is also sub-divided into the
following types:
i.Itemized Category Scales – are also known as Satisfaction Scales (or)
Discrete Scales. These are four categories from which respondent can
choose to indicate their overall level of satisfaction with their present
facilities provided by the service provider. They are:
A. Very satisfied
B. Quite satisfied
C. Somewhat satisfied
D. Not at all satisfied
ii.Numerical Scale – under this scaling of the response categories from
+2 to -2, as presented in the following chart
Very Satisfied Very Dissatisfied
+2 ` +1 0 -1 -2
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iii.Comparative Scale – is another form of the itemized scale would
be labelling the categories into excellent to poor and thereby
eliminating the implicit comparison
Excellent Very Good Good Fair Poor

iv.Ordinal scale / rank order scale – represent member, letter or
other symbols used to rank items. The ranking of certain
attributes to as deemed important by the respondent is obtained
through this scale. For example, rank the following attributes on
a scale of 1 to 5 according to the importance of a laptop.
A. Brand in age
B. Features
C. Price
D. Comfort
E. Design
v.Q-Sort scaling or order category sorting in Q-sort scaling the
respondents are asked to sort the various characteristics or
objects that are being categorized into various groups, such that
the distribution of the numbers of objects or characteristics in
each group follows a normal distribution.
vi.Pictorial scales – are used different measurements are
expressed with pictures, line drawings, etc.
vii.Staple scales – are unipolar, 10-point interval, rating from +5 to
-5. And are balanced without neutral point.
viii.Semantic differential scales – are usually 7-point scales. They
are bi-polar with a neutral point like rating +3 to -3.
ix.Constant-sum scales – require respondents to allocate a fixed
number of rating points among several objects, to reflect the
relative preference of each object. Usually, 10 or 100 points are
distributed among the object to reflect the difference and gap.
x.Interval scale – represents numbers used to rank items such
that numerically equal distances on the scale represent equal
distance in the property being measured. It involves qualitative
description of aspects of a product or trait of a person. For
example, rate your present mobile phone on the following
qualities.
85
A Product Design Poor 1 2 3 4 5 Good
B Brand Name Lesser Known 1 2 3 4 5 Well Known
C Price Low 1 2 3 4 5 High
After Sales Very Very
D 1 2 3 4 5
Service Dissatisfied Satisfied
xi.Ratio Scale – Represents consist of numbers that rank items such that
numerically equal distances on the scale represent equal distances in
the property being measured and have a meaning full zero. All
descriptive measures and inferential techniques are applications of ratio
scaled data.
xii.Paired Comparison method – when two or more stimuli to judge, the
number of judgments are required in paired comparison is given as
N = n (n-1)
2
Where,
N = Number of Judgments
n = number of objects stimuli to be judged.
xiii.Specialized scales – are the judgments against other similar objects.
The respondents directly compare two or more objects and may choose
among them.
• Nominal Scale – for example roll numbers, categories, etc
• Ordinal Scale – Example grading in Exams, Temperature
• Ratio Scales – Example, length, Distance, Salaries, etc.
xiv.Comparative judgment by L.L. Thurstone. It involves converting the
frequencies or preferences into a table of proportions. This is then
transformed to Z matrix by referring to the table area under the curve.
xv.Arbitrary Scales – they are developed on an ad-hoc basis and are
designed largely through the researchers own subjective selection of
items. The researcher first collects a few statements or items which he
believes are unambiguous and appropriate to a given topic, then a few
of them are selected or included in the statement on which they agree.
xvi.Differential scales / Thurstone types of scales – are developed using
consensus scale approach, when a panel of judges who evaluate the
items of whether they are relevant to that topic area are unambiguous
in implication makes the selection of items.
xvii.Summated Scales / Likert Type scales – are developed by utilizing
the items analysis approach wherein a particular item is evaluated on
the basis of how well it discriminates between those persons whose total
score is high and those where score is low. The summated scale
86
consists of a number of statements, which express either a favorable or
unfavorable attitude towards a given object to which the respondent is
asked to react. The respondent indicates his agreement or
disagreement with each statement in instrument. Each response is
given a numerical scale, or score and these scores are totaled to
measure the respondent’s opinion.
The most frequently used summated scales in the study of
social attitudes follow the patterns devised by Likert
Strongly Agree Agree undecided Disagree

Strongly Disagree
xviii.Cumulative Scales – these scales consist of a series of statements
to which a respondent express his agreement or disagreement.
These statements are from a series. They are related to one another
in such a way that an individual who replies favorably to say item
no.2, and also replies to favorable item 2 and 1 and so on.
Then the individual’s score is worked out by counting the number of
statements he answers favourably. If one knows the total score can
estimate as to how a respondent has answered individual
statements counting cumulative scales.
xix. Special Scale – it is the modification of the differential scale. It
refers from the semantic differential scale in that the adjectives or
descriptive phrases are tested separately instead of simultaneously
as bipolar pairs. Also, the points on the scale are identified by
member as these are ten scale positions rather than five or seven as
in the required manner. It is formulated -5 to +5 without a neutral
point.
xx.Fractional Rating Scale – It requires the rates to rate an object by
comparing it with reference point. The goal is ratio-scale
representation of attitudes toward the complete set of objects. For
example, please divide 100 points among the following two TV
brands
Sony ---- Points
Samsung ---- Points
xxi.Fishbein’s Scale – This scale uses a combination of constant sum
and semantic different scale. To assess how consumers perceive a
set of alternative offerings, this type of scale is used. Here, the
respondent is first asked to assign weight age to a set of given
attributes. Afterwards the respondent is given some specific choice
87
alternative. It is used in problems such as comparing brand image
and advertising designs.
xxii.Multi-Dimensional Scaling – can be characterised as a set of
procedures for portraying perceptual or effective dimensions of
substantive interest. It is used when all the variables in the study are
to be analysed we simultaneously and all such variables happen to
be independent.
xxiii.Semantic differential scaling – was developed by Charles E. OS
good, G.J. Suci and PH. Tennenbnum in 1975. It is an attempt to
measure the psychological meaning of an object to an individual. For
example the items of analyzing candidate for leadership position
may be as under:
(E) Successful Unsuccessful
Lenient
(P) Severe
Light
(P) Heavy
Cold
(A) Hot
Regressive
(E) Progressive
Weak
(P) Strong Passive
(A) Active Slow
3 2 1 0 -1 -2 -3
(E) Fast False
(E) Sociable Unsociable
xxiv.Disguised, Structured Scaling Techniques.

For the disguised, structured sealing method of data collection, certain
projective techniques are used:
The popular projective tests are:
a) Word Association – A series of situations or words is given to the
respondents, and they are asked to fill up the first word or brand which
comes to mind. It is interesting for the respondent to fill up the various
word associations. It is quick and easily understood. For example,
Dove = Love
b) Sentence completion – the respondent is given a number of
sentences and asked to complete them. The respondents profit as
well as his attitude towards certain felling can be approximated. The
respondents require more time to fill up the sentences. For example,
a person listening to 93.5 FM radio regularly is_________
88
c) Thematic Apperception Test – pictures instead of words are used
in this technique. A series of pictures are shown to the respondent
who may he asked to compare them or answer questions on the. The
inner must attitude of the respondents can get reflected if the
technique is properly administered. It is difficult to interpret the
responses at times.
d) Story-telling – A situation is described to the respondent who is
asked o to complete the story based on his opinion and attitude. This
technique holds he in test of the respondent, but it results may be
difficult to interpret as the responses would be varied. However, it is
extensively used tap any creative responses which can be put to use.
e) Home building / Body building – the important values such that they
can be used to construct a house or build a body. The core values of
the brand might form the foundation of the house or the heart of the
body. The packaging or after sales service might be viewed as arms
or feet or windows as the case may be.
The respondent may not be able to complete the house or body in
can the brand has few values. A strong brand, on the other hand,
results in a strong body or house.
f) Multi-item scaling – are widely used is social sciences research to
measure abstract constructs. The characteristics that are to be
measured is generally inferred to us the construct. It starts with
developing theory …. ends in the final scale.
LET US SUM UP
The term measurement refers to the process of associating numbers or
symbols to observations obtained in a research study. The observation
could be qualitative or quantitative. Moreover, we have discussed the
techniques of developing measurement tools, testing of measurement
tools like validity, reliability, testing of measurement tools like validity,
reliability, practicability, etc. The scaling describes the procedure of
assigning numbers to various degrees of opinion, attitude and other
concepts. The scaling classification bases, various types of scaling
techniques are discussed. This will give an in-depth understanding on
measurement and scaling techniques to the readers.
CHECK YOUR PROGRESS
1. Which scale is the simplest form of measurement?
a) Ordinal
b) Interval
c) Ratio
89
d) Nominal
2. Absolute zero exists in
a) Nominal scale
b) Interval scale
c) Ordinal scale
d) Ratio scale
3. Assignment of numerals to the objects to represent their attributes is
known as:
a) Nominal data
b) Ordinal data
c) Interval data
d) Ratio data
4. In the level of measurement, ________used to simply depict the order
of variables, not to make difference between variables?
a) Interval scale
b) Ordinal scale
c) Ratio scale
d) Nominal scale
5. Variable that can take all possible values in are called
a) Intervening variable
b) Extraneous variable
c) Continuous variable
d) Discrete variable
GLOSSARY
Scaling : It is a method of placing respondents in

Technique continuation of gradual change in the pre-
assigned values, symbols or numbers based on
the features of a particular object as per the
defined rules.
Measurement : It is the process of observing and recording the
observations that are collected as part of a
research effort.
Ordinal Scale : It includes statistical data type where variables
are in order or rank but without a degree of
difference between categories.
Validity : It refers to how accurately a method measures
what it is intended to measure
Reliability : It is the degree to which research method
produces stable and consistent results
90
SUGGESTED READINGS
McGraw Hill, India
4) Kothari, C.R., (2019), Research Methodology, Fourth Edition,
New Age International (P) Ltd, New Delhi.
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. Scaling techniques in research methodology with examples /
Scales of Measurement with examples - Bing video
2. Scaling Techniques in Research Methodology | தமிழில் - Bing
video
3. RESEARCH METHODOLOGY-MEASUREMENT & SCALING
TECHNIQUES - YouTube
1. d) 2. d) 3. a) 4.b) 5.c)
91
BLOCK 3
DATA COLLECTION
UNIT 9 : SOURCES OF DATA
UNIT 10 : SCHEDULE AND QUESTIONNAIRE
UNIT 11 : INTERVIEW METHODS AND DATA

COLLECTION
UNIT 12 : PILOT STUDY AND PRE-TESTING
UNIT 13 : DATA PROCESSING
UNIT 14 : TABULATION OF DATA
UNIT 15 : ORGANISING DATA – GRAPHS AND
DIAGRAMS
92
UNIT 9
SOURCES OF DATA
STRUCTURE
Overview
Learning Objectives
9.1 Sources of data
9.1.1 Primary data
9.1.2 Advantages of primary data
9.1.3 Disadvantages of primary data
9.2 Secondary data
9.2.1 Advantages of secondary data
9.2.2 Disadvantages of secondary data
9.2.3 Distinction between primary and secondary data
9.3 Documentary sources
9.3.1 Documentation services in India
9.4 Location services
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The first step in the statistical approach to a problem is collection of
statistical data or facts. These data are the basic information for the
statistical inferences, and it is depending on the data sources used by the
researcher. Thus, the researcher must be given utmost importance
gathering the data or facts. This unit will provide various types of data and
necessary steps to be followed for the collection of data.
LEARNING OBJECTIVES
• explore the sources of data
• discuss both primary and secondary data
• explain the documentation services in India.
9.1 SOURCES OF DATA
The sources of data are broadly classified into both primary data and
secondary data. According to Pauline V. Young, “the sources of
information can be classified into documentary source and field source.
93
The books manuscripts, diaries, letters, etc the form the secondary or
documentary source and the information collected from individuals and
groups constitute primary or field data”. So, the above grouping is a useful
classification for discussion.
9.1.1 Primary data
Primary data is one which is collected by the researcher himself for the
purpose of a specific inquiry or study. Such data is original in character
and is generated by surveys conducted by individuals or researchers, or
research institutions. The primary data is collected through observation,
interview, mail questionnaire, audio-visual aids, etc.
9.1.2 Advantages of primary data
The advantages of primary data include:
a) The degree of accuracy is quite high.
b) It does not require extra caution
c) It depicts the data in great detail.
d) Data collection frequently includes definition of various terms and
units used.
e) For some investigations, secondary data are not available.
9.1.3 Disadvantages of primary data
The disadvantages of primary data include:
a)Collection of data requires a length of time.
b)It requires more labour effort.
c)It also requires more time.
d)It requires more expenses also
e)For some investigations, the primary data in not possible to
collect.
9.2 SECONDARY DATA
Secondary data refers to when a researcher uses the data which has
already been collected by others. The data is primary data for the agency
that collected it and becomes secondary data for someone else who uses
this data for his own purposes. The secondary data can be obtained from
newspapers, journals, reports, research public actions, research
organization, government publications, etc.
9.2.1 Advantages of secondary data
The advantages of secondary data are:
a) Wider Range of Availability of Data.
b) Less Expensive One
94
c) It Saves Time.
d) Speedy Collection of Data.
e) Serves As a Source Comparative Data, Etc.
9.2.2 Disadvantages of secondary data
The disadvantage of secondary data is:
a) Lack of consistency of perspective.
b) Biases and inaccuracies cannot be checked.
c) Published information often raises more questions than they
answer.
d) The data can be totally separated from the context of its collection,
etc.
9.2.3 Distinction between primary and secondary data
S.No Primary data Secondary data
1. Original / primary source. Secondary source
2. Raw / observed data. Published data
3. Not done the statistical

Done the statistical process
process.
4. Used for specific purpose. Use for different purpose
5. Terms and definitions of the Terms and definitions of the

units are included. units are not included.
6. Copy of questionnaire is Copy of questionnaire is not

included. included.
7. Description of sample is Description of sample is not

given. given.
8. Requires more time to collect. Requires less time to collect.
9. More expensive. Less expensive.
10. More accurate. Less accurate.
9.3 DOCUMENTARY SOURCES

A document is anything in writing that contains matters of both sociological
and business importance. A document is published or unpublished one.
Most of the documents are written in the past when the phenomena took
place and are not specially prepared for the study of the present problem.
The documents have been classified into two heads: Personal documents
and public documents.
95
I. Personal documents – are recorded by the individuals by their
thoughts and views about various problems, finally it also turned
into a source of study. It includes life history, diaries, letters,
memoirs of their travels, etc. The personal documents have
provided us with useful information regarding language social
customs, religious faith, culture, career, professional life, and so
on.
II. Public documents – deal with matters of different interest. Public
documents are classified into two types. They are (a) unpublished
documents and (b) published documents.
a) Unpublished documents – such documents are also called
unpublished records. They deal with matters of public interest
that are not available to people in published one. It means that
everybody cannot have access to them. Example, resolutions
passed in meetings, articles, memorandum, etc.
b) Published documents – it is also called published records.
They are available for personal and investigation. Example,
survey reports, committee report, commission report,
newspapers, journals, etc.
9.3.1 Documentation services in India
The information explosion in the present decade has highlighted the role
of documentation services. At present more than 500 social sciences
research information centers are working and providing information for
various research purposes. The documentation services are provided by
libraries, documentation centers, commercial institutions, professional
organization, and so on. They are,
a) Current Awareness Services (CAS)
b) Bibliography of Doctoral Dissertations.
c) Non-Doctoral Research – ICSSR Newsletter.
d) Small Enterprises National Documentation Centre.
e) Centre for Development Instructional Technology.
f) National Council of Applied Economic Research.
g) India Index – Rajasthan University Library.
h) Current Management Literature, Administrative College of India.
i) RBI Reports.
j) Ministry of Industry and Commerce Publications, etc.
9.4 LOCATION SERVICES
This service consists of:
I. Locating a document.
II. Locating the address of the institution.
96
III. Locating the biodata of the scientist.
The available tools saving the above purpose in India are:
a) Union list of social sciences periodicals.
b) Union catalogue of social science serials.
c) Directory of libraries.
d) Directory of social science research institutions and directory of
professional organizations in India.
e) National register of social scientists in India.
f) Reprographic service and translation service.
LET US SUM UP
The data is the basic formation for statistical inference. It is purely
depending on data used for the purpose. The sources of data can be
primary or secondary one. The primary data is collected by the researcher
from the study areas for the specific purpose. The secondary data is also
collected by the researcher from the published sources. Moreover, we had
a very good discussion on difference between primary and secondary
data, documentation services location services, etc. This discussion will
give background knowledge to the readers about the sources of data.
CHECK YOUR PROGRESS

1. What are the two types of research data?
a) Organized and unorganized data
b) Qualitative and quantitative data
c) Processed and unprocessed data
2. The data which are collected from the place of origin is known as
a) Primary data
b) Secondary data
c) Primary & Secondary
d) None of these
3. Source of data collected and compiled by others is called
a) Primary data
b) Secondary data
c) Primary & Secondary
4. Which of the following is an example of secondary data?
a) RBI Bulletin
b) Government Publication
c) Committees and commissions
d) All of the above
97
5. Information in the research is
a) Raw Data
b) Processed data
c) Input data
d) Organized data
GLOSSARY
Primary Data : Data collected by researchers directly from main
sources through interviews, surveys,
experiments, etc
Secondary Data : Means data collected by someone else earlier.
Unpublished : Means data published in a non-commercial form

Documents
SUGGESTED READINGS
1) Arora, P.N. & S. Arora, (2007) ,Statistics for Management, latest
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. Secondary Sources | Methods of Data Collection - Primary Data
Collection - Observation in Tamil - Bing video
2. Sources of Data | Research Methodology - Bing video
3. Data collection in Tamil - YouTube
1. b) 2. a) 3. b) 4. d) 5. d)
98
UNIT 10
SCHEDULE AND QUESTIONNAIRE
Structure
Overview
Learning Objectives
10.1 Schedule – meaning
10.1.1 Objectives of the schedule
10.1.2 Characteristics of a good schedule
10.1.3 Types of schedules
10.1.4 Layout of schedule
10.2 Questions to be included in schedule
10.2.1 Types of questions
10.2.2 Questions to be avoided in schedule
10.2.3 Advantage of schedule
10.2.4 Limitations of schedule
10.2.5 Organising of schedule
10.3 Questionnaire
10.3.1 Types of questionnaires
10.3.2 Process of questionnaire technique
10.3.3 Factors affecting responses
10.4 Distinction between schedule and questionnaire
10.4.1 Advantages of questionnaire technique
10.4.2 Limitations of questionnaire technique
10.4.3 Sources of bias in questionnaire
10.4.4 Ways to reduce bias in questionnaire
Let us sum up
Check your progress
Glossary
Suggested Readings
99
OVERVIEW
When information is to be collected by asking questions of people who
may have the desired data, standardized form called questionnaire or
schedule is prepared. The questionnaire is a list of questions to be asked
respondents and space in which to record the answers. Each question is
worded exactly as it is to be asked, at the end questions are listed in an
established sequence. In this lesson, we had a very good discussion on
schedule and questionnaire used as a tool of data collection.
LEARNING OBJECTIVES
• explain the meaning of schedule and questionnaire.
• discuss the characteristics of schedule.
• explain the forms of questionnaire.
• explore the ways of reducing bias in questions.
10.1 SCHEDULE – MEANING
The term schedule may be defined as a Performa that contains a set of

questions which are asked and filled in by an interviewer in a face-to-face
situation with another. It is a standardized device to collect data in an
objective manner. In this method of data collection through schedule the
interviewer puts certain questions and the respondent furnished certain
answers and the interviewer records them as the answers are given.
10.1.1 Objectives of the schedule
The main objectives of the schedule are:
• The schedule delimits and specifies the subject of enquiry.
• The schedule acts as an aide memory.
• It helps to aid classification and analysis.
10.1.2 Characteristics of a Good Schedule
The following are the characteristic of a good schedule consists of:
• The question given in the schedule should be easily read and
understood by the respondents.
• The size of the schedule should be attractive.
• The questions of the schedule should be unambiguous.
• The questions should be free from subject evaluation.
• The questions should be inter-linked.
• The information sought should be capable of being tabulated.
• The question should be planned to get the required information
based on the variables labeled.
100
10.1.3 Types of schedules
The schedules are classified into:
i. Observation schedule – the observer records the activities and
response of an individual or a group under specific conditions.
ii. Rating schedule – the rating schedules are used to access
attitudes, opinions, prefers inhibitions and other similar elements.
iii. A document schedule - is used to obtain data regarding written
evidence and case historical form, autobiography, diary, case
histories, records of governments, etc.
iv. Institution survey schedule – is used for studying the different
problems of the institutions.
v. Interview schedule – is an interviewer presents the question of the
schedule to interviewee and records their responses on the blank
spaces.
10.1.4 Layout of schedule
The external aspect of the schedule is known as the form or structure of

the schedule. The chance of success of the schedule is adequate
attention. The attention is spread over on the layout of the schedule. It
considers the following things:
• Quality of the paper.
• Size of the schedule (ie 8 ½” x 11”)
• Printing / writing is done on only one side of the paper.
• The schedule comprises title, sub-title and columns.
• The margin space left 2”or 1” and right 1” or 1/2”
• There should be enough space for no responses.
• The schedule may be printed or may be cyclostyled.
• Use of pictures.
10.2 QUESTIONS TO BE INCLUDED IN THE SCHEDULE
The questions that should be included in the interview schedule are:
• The questions should be very short and simple.
• The questions should be easy to understand for the respondents.
• It should be amendable to statistical tabulations.
• The question must be interrelated.
• The questions should be free from personal bias.
• The questions should be standardized.
• Precise terms should be used in framing the questions.
• They should be subject to protest.
101
10.2.1 Types of Questions
The questions of the schedule may be classified into:
• Open ended questions.
• Closed ended questions.
• Dichotomous questions.
• Multiple choice questions.
• Leading questions.
• Ambiguous questions.
• Ranking items of questions.
• Pictorial questions, etc.
10.2.2 Questions to be avoided in schedule
The following types of questions must not be included in the schedule:
• Lengthy or circumlocutory questions.
• Compound and complex questions.
• Presuming questions.
• Personal questions.
• Questions involving memory.
• Embarrassing questions.
• Questions on periodical behaviour.
• Questions that is insufficiently specific.
• Unrelated questions.
• Hypothetical questions.
• Questions not capable of being tabulated, if required, etc.
10.2.3 Advantage of schedule
The schedule method has the following advantages:
• The Schedule received higher response from the respondents.
• The Schedule helps in saving time in data collection.
• The Schedule gives personal contract between the respondent
and field investigator.
• The Schedule assists to enquire deeper in the personality, living
conditions, value system, etc. of the respondents.
• The Schedule helps to detect the defects in sampling and rectified
by the investigator.
• The Schedule also helps to remove the doubts of the respondents
• The Schedule assists to the human elements make the study
reliable and dependable.
10.2.4 Limitations of schedule

The schedule method suffers from the following limitations:
102
• The Schedule is a more expensive one.
• The Schedule is a time-consuming process.
• The Schedule needs well trained field worker / investigator.
• The Schedule becomes difficult to organize research.
• The Schedule leads to adverse effects of personal presence, etc.
10.2.5 Organising schedule
The organizing of the schedule involves the following:
• The selection of required sample respondents.
• The selection and training of the field investigators.
• The filed investigator should approach the respondent.
• For the proper response, the investigators should be able to
convince the respondents.
• The proper and correct reply to the respondent should not be hurt,
etc.
10.3 QUESTIONNAIRE
A questionnaire consists of a number of questions written or printed in a

definite order on a form or set of forms. It is sent to respondents who are
expected to read and understand the questions and write down the reply
in the space meant for the purpose in the questionnaire itself. The
respondents have to answer the question on their own.
The method of collecting data by mailing the questionnaire to respondents
is most extensively purpose of questionnaire is twofold:
i. To collect information from the respondents who are scattered in
a vast area.
ii. To achieve success in collecting reliable and dependable data.
10.3.1 Types of questionnaires
The types of questionnaires are:
i. Structured questionnaire – contains definite, concrete, and direct
questions.
ii. Un-structured questionnaire – consists of partially computed
questions or statements.
iii. Close-ended questionnaire – is also turned as restricted
questionnaire. Here, the respondents selected the response in the
questionnaire, and they have not been able to frame their own
response.
iv. Open-ended questionnaire – is also named as un-restricted
questionnaire. Here, the respondents have the freedom to frame
and supply their own views.
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v. Mixed questionnaire – consists of both close ended open-ended
questionnaire.
vi. Facts questionnaire – the questionnaire of fact, which requires
certain information of facts respondent without any reference to
their opinion.
vii. Opinion questionnaire – the questionnaire of opinion in which the
informant’s opinion, attitude or preference regarding the
phenomena is sought and
viii. Pictorial questionnaire – involves pictures are used to promote
interest in answering questions.
10.3.2 Process of questionnaire technique
The study of questionnaire is divided into designing, issuing and returning.
When the questionnaire designing attention should be paid on three
important aspects: physical appearance, contents and subject matter of
questionnaire. Moreover, the process includes the following steps:
• Consult colleagues, experts, etc associated with the problem.

• Formulate a list of questions associated with the problem.
• Submit the list to experts both in the field of problem and related
fields.
• Drafting the questionnaire at the first stage.
• Pre-testing the questionnaire.
• Revising the questionnaire at the second stage.
• Employ the field for large scale study and
• Editing and coding the questionnaire responses.
10.3.3 Factors affecting responses
The various factors responsible for varying degrees of response to the
questionnaire is:
• Characteristics of the group.
• Prestige of sponsoring body.
• Nature of questionnaire
• Size of the questionnaire
• The cover letter accompanies the questionnaire must be in brief,
etc.
10.4 DISTINCTION BETWEEN SCHEDULE AND QUESTIONNAIRE
Schedule Questionnaire
i. Direct method of primary data i. Indirect method of primary data

collection. collection.
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ii. Direct contact between ii. Direct contract does not exist
respondent and researcher. and the response through port
only.
iii. Covers a very large
iii. Covers a limited geographical
geographical area.
area.
iv. Less reliable data.
iv. Highly reliable data.
v. Lengthy and elaborate answers
v. Short and pointed answers to
to the questions.
the questions.
vi. Low response.
vi. Very high response.
vii. Full text of the question has to
vii. Full or part of the question can
be distributed.
be distributed to the respondent.
viii. Not feasible to motivate
viii. Feasible to motivate
respondents.
respondents.
ix. Less expensive.
ix. Expensive one.
x. Required less time.
x. Require more time.
xi. Simple to organise.
xi. Difficult to organise.
xii. Requires less trained and
xii. Requires trained and qualified
qualified field workers.
field worker.
10.4.1 Advantages of questionnaire technique

The advantages of the questionnaire method are:
• The questionnaire is more economical compared with the
schedule.
• The questionnaire also reduces the time is collection of data.
• The questionnaire is more suitable in special types of response.
• The questionnaire helps to ensure anonymity to express opinion.
• The questionnaire puts less pressure on the respondents.
• The questionnaire gives uniformity in measurement.
• Mail questionnaires are popularly used, when the field of research
in wider.
10.4.2 Limitations of questionnaire technique
The questionnaire method suffers from the following limitations.
• Less educated and illiterate are involved.
• Questionnaire not able to answer in detailed manner.
• The percentage of returning the questionnaire is very low.
• Misinterpretation is also possible.
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• It requires more experience and common sense also.
10.4.3 Sources of bias in questionnaire
Bias refers to an indicator, predisposition, an influence in certain direction,
prejudice or performed notions. In any research work ought to be free from
bias. Biased conclusions are wrong and may prove disastrous. The
sources of bias are discussed below:
• Misleading or ambiguous questions lead to bias.
• The interviewer can introduce bias.
• The respondent can also introduce bias.
• The wrong sample may lead to bias.
• Bias in data collection method.
• Bias in data analysis method.
• Bias in inference.
10.4.4 Ways to reduce Bias in questionnaire
The following ways are assisted to reduce bias in questionnaire:
• The questions should be free from bias.

• Questions should be sequenced properly.
• Multiple choice questions should be carefully selected.
• The constructions of the questionnaire should be impressive.
• Pre-testing of questionnaire helps to improve the questionnaire.
• Enough space should be provided to record the answer.
• Lengthy and comprehensive questions are better avoided.
• The questions are answer able to the respondents.
• Avoid suggestive questions.
• The questions should be as brief as possible.
• The respondents are to be given a proper briefing.
• The interviewers are to be trained properly.
10.5 QUESTIONNAIRE / INTERVIEW SCHEDULE
MODEL QUESTIONNAIRE / INTERVIEW SCHEDULE

A STUDY ON CUSTOMER SATISFACTION WITH REFERENCE
TO NEW GENERATION BANKS IN CHENNAI CITY
Dear Sir/Madam,
I am xxxx, doing Ph.D (Full Time) Department of Commerce xxx
University. My topic of research is ‘A Study on Customer Satisfaction
with reference to New Generation Banks in Chennai City’. Here with, I
have attached a well structured questionnaire. Please oblige and fill up the
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questionnaire. The response given by your self is purely for academic
research purpose only. Please put ☑ tick mark to indicate your response.
Yours faithfully
XXX
I. General information
1.0. Name : ………………………………………..
2.0. Gender : 1.1. Male 1.2. Female
3.0. Age group : 3.1. Below 25 years 3.2. 25 to 35 years
3.3. 35 to 45 years 3.4. 45 to 55 years
3.5. 55 and Above
4.0. Marital status : 4.1. Unmarried 4.2. Married
5.0.Educational Qualification:
5.1. Below SSLC 5.2. SSLC/HSC/PUC
5.3. UG/PG 5.4. Professional 5.5.Others
6.0.Occupation : 6.1. Government service 6.2. Private Service
6.3. Self employed 6.4. Student
6.5. House wife 6.6. Others
7.0. Size of monthly income (in Rs):
7.1. Below 30,000 7.2. 30,000 to 50, 000
7.3.50, 000 to 1, 00,000 7.4. 1,000,000 and above
8.0. Name of the bank in which you are maintaining the accounts
8.1.ICICI Bank 8.2. HDFC Bank
8.3. AXIS Bank 8.4. Kotak Mahindra Bank
8.5. Yes Bank 8.6. Induslnd Bank
8.7.IDFCBank 8.8. Citi Bank
8.9. DCB Bank 8.10. RBL Bank
8.11. Bandhan Bank 8.12. Others
9.0. Nature of the account:
9.1. Savings A/C 9.2. Current A/C
9.3. Demat A/C 9.4. Term deposit
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9.5. Recurring Deposits 9.6. Others
10.0. Frequency of using bank service per month:
10.1. Less than 1 time 10.2. 2 to5 times
10.3. 6 to10 times 10.4. More than 10 times
11.0. How long you are using bank services
11.1. Less than 1 year 11.2. 1 to 3 year
11.3. 3 to 5 years 11.4. 5 to 10 year
11.5. Above 10 year
12.0. Reason for maintaining accounts with new generation bank
12.1. Up-to-date technology 12.2. Service quality
12.3. Speedy Services 12.4. Quick loan processing facility

12.5. Customer retention 12.6. Others
To measure the opinions of the respondent likert scaling technique is
given. Please give your opinion in the given boxes, use tick marks.
Strongly
Strongly Agree Agree Neutral Disagree
Disagree
SA A N DA SDA
II. CUSTOMER AWARENESS

13.0 Customer Awareness SA A N DA SDA
13.1 Reading of books, journals and
magazines
13.2 Through friends and relatives
13.3 About your bank
13.4 Website of the bank
13.5 Help function on e-banking
13.6 Technology adoption level
13.7 About internet banking
13.8 About mobile banking
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13.9 Online banking services, information
and enquiries
13.10 Granting loans
13.11 Managing ATM and debit, credit
card through internet banking
13.12 Various rules and regulations
regarding internet banking
13.13 Online complaint procedures
13.14 Claim settlement procedures
13.15 Online grievance handling
13.16 Fund transfer through internet
banking
13.17 NEFT and RTGS facility as a mode
of payment
13.18 Frequent change in password
13.19 Account Handling Charges
13.20 Monthly interest and loan schemes
13.21 SMS alerts about specific
information to the bank services and
new products
13.22 Use of personal mobile and computer
13.23 Login and Sign off
13.24 Unnecessary web activities
13.25 Using the same login and password
in any other websites
13.26 Never share user ID’s, password and
PIN number
III. CUSTOMER RETENTION
14.0 Customer Retention SA A N DA SDA

14.1 Modern equipments and software’s
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14.2 Visually appealing physical facility
14.3 Within timeframe service delivery
14.4 Visually appealing material
14.5 Operational accuracy and secrecy
14.6 Help in financial problems
14.7 Prompt services delivery and error
correction
14.8 Responding customer requests
14.9 Responding customer’s
correspondence
14.10 Efficiency service delivery
14.11 Within time frame service delivery
14.12 Knowledge and competency of staff
14.13 Felling of safety while transacting
14.14 Feedback guided behavior
14.15 Personal attention
14.16 Understanding specific needs
14.17 Accepting and resolving faults
14.18 Extending banking hours
14.19 Single window services
14.20 Introduction of new loan schemes
14.21 Variety of service offered
14.22 Convenience to operating account
14.23 Goodwill and reputation of the bank
14.24 Timings of the bank
14.25 Reduce paperwork
14.26 Near to my home and office
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IV. CUSTOMER SERVICE QUALITY
15.0 Customer Service Quality SA A N DA SDA
15.1 Efficient services

15.2 Offers latest electronic products and
technology
15.3 Listens and be sensitive to
consumers’ needs
15.4 Flexible banking policies
15.5 Many branches location
15.6 Fair method of setting fees
15.7 Extended banking hours
15.8 Offers unique and distinctive
products
15.9 Competitive pricing compared to
others
15.10 ATMs transactions
15.11 Credit and debit card facility
15.12 Levying of charges
15.13 Pension
15.14 Mutual fund and insurance premium
15.15 Safe lockers
15.16 Educational loans
16.17 Pay utility bills
15.18 Harassment in recovery
15.19 Remittances
15.20 View account balance and statements
15.21 Ask for a cheque book
15.22 Enquire about cheque status
15.23 Request to stop cheque payments
15.24 Enquire about TDS details
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15.25 Online trading with Demat services
15.26 Update your profile
15.27 Download applications
15.28 Apply for loan and other services
15.29 Request demand draft and pay order
15.30 Pay with credit card dues
V. PROBLEMS FACED BY CUSTOMERS

16.0 Problems Faced by SA A N DA SDA
Customers
16.1 Difficult to change bank account
16.2 Lack of guidelines about product
features
16.3 Poor advisory services
16.4 High service charges
16.5 Unattractive products
16.6 Poor dealing of bank staff
16.7 Lack of commitment and
motivation from the bank staff
16.8 Lack of trained staff for
customer education
16.9 Poor relationship management
16.10 Experience of financial loss
from bank
16.11 Stiff competition of the
specialized financial institutions
16.12 Lack of diversity
16.13 No specialized officer
16.14 Pressure of the other financial
products
16.15 Product is still at infancy
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16.16 Absence of bank assurance
agents
16.17 Lack of confidence of the
customers
16.18 Lack of technical security
provided by the banks in regard
to online banking
16.19 In sufficient safety measures
installed in the ATMs
16.20 Unsuitable location of ATMs
16.21 ATMs machine out of cash and
order
16.22 Limited number of cash deposit
machines
16.23 Lack of through knowledge of
technology
16.24 Customer relationship
management
16.25 Familiar with computer usage
level
VI. CUSTOMER SATISFACTIONS

17.0 Customer Satisfactions SA A N DA SDA
17.1 Location of branch
17.2 Layout of branch
17.3 Security and safety
17.4 Level of privacy offered in branch
17.5 Hospitality of branch
17.6 Cleanliness of branch
17.7 Infrastructure facilities like parking
17.8 Branches cash machine being
cleaned and tidy
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17.9 Branches cash machine providing
readable printouts
17.10 Managing account
17.11 Handling of account efficiency and
transaction time
17.12 Price of service provided
17.13 Statement of accounts
17.14 Handling of enquiries and way of
staff answer call
17.15 Quickly enquiry was understood and
responded
17.16 Ease of reaching the person, need to
speak with
17.17 Way your complained was handled
17.18 Time taken to sort complaint
17.19 Follow-up contact you received
17.20 Staff quality and knowledgeable
17.21 Customer support
17.22 Able to give good advice and
attention
17.23 Apologies for any mistake
17.24 Efforts to reduce queuing time
17.25 Quickly cashier carry out
instructions
17.26 By any other product or services
from this bank
17.27 Access to electronic transactions
17.28 Remain a customer of this bank in
future
17.29 Recommend this bank to a friend and
relatives
17.30 Overall satisfied with the bank
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Give your suggestions:
……………………………………………………………………………
………………………….…………………………………………………
…………………………………….......................
Thank you very much for your cooperation.
LET US SUM UP
Let us sum up, this lesson gives an in-depth discussion on schedule and
questionnaire. The schedule is a pro forma which contain a set of
questions which are asked and filled by an interviewer in face to face
situation with another, while questionnaire is a list of questions to be asked
respondents and space discussed characteristics of schedule, types,
layout, questions to be avoided in schedule, etc. moreover the
questionnaire, the process of preparing questionnaire, types, the factors
affecting responses, the main difference between schedule and
questionnaire, sources of bias in questionnaire, the ways to reduce bias
in questionnaire, etc. are discussed. This lesson will give good
background information for the preparation of questionnaire / schedule for
the collection of primary data.
CHECK YOUR PROGRESS

1. A questionnaire that offers no scope for any respondent’s own view
is called:
a) Closed-ended
b) Schedule
c) Open-ended
d) Unstructured
2. For conducting a large survey to know the opinion of teaches
regarding Higher Education, which tool will be most appropriate?
a) Questionnaire
b) Interview
c) Observation
3. Which of the following steps are required to designs a questionnaire
i. Writing primary and secondary aims of the study
ii. Review of the current literature
iii. Prepare a draft of the questionnaire
iv. Revision of the draft
a) i, ii and iii
b) i, iii and iv
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c) ii, iii and iv
d) i, ii, iii and iv
4. Questionnaire is filled by
a) Respondent
b) Everybody
c) Enumerator
5. A researcher is interested in studying the prospects of a particular
political party in an urban area. So, what tool should he prefer for the
study?
a) Rating Scale
b) Interview
c) Questionnaire
d) Schedule
GLOSSARY
Interview Schedule : a list containing a set of structured questions

that have been prepared, to serve as a guide for
interviewers, researchers and investigators in
collecting information or data about a specific
topic or issue and filled by the investigator.
: is a research instrument that consists of a set
Questionnaire
of questions to collect information from a
respondent
: is one that provides respondents with a fixed
Close-ended
number of responses from which to choose an
Questionnaire
answer.
: are questions that do not provide participants
Open-ended
with a predetermined set of answer choices,
Questionnaire
instead allowing the participants to provide
responses in their own words.
: is a document that consists of a set of

Structured
standardized questions with a fixed scheme,
Questionnaire
which specifies the exact wording and order of
the questions, for gathering information from
respondents.
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SUGGESTED READINGS
House, Mumbai.
6. Vohra, N.D., (2017) Business Statistics, latest Edition, McGraw Hill,
New Delhi,
McGraw Hill, India
India
WEB RESOURCES
1. How to prepare questionnaire for research | Tamil - YouTube
2. Questionnaire and Schedule Method - YouTube
3. Research Methodology | Schedule method of data collection |
Lecture 5 - YouTube
1. a) 2. a) 3. b) 4.a) 5. c)
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UNIT 11
INTERVIEW METHODS AND DATA
COLLECTION
STRUCTURE
Overview
Learning Objectives
11.1 Observation
11.2 Interview
11.2.1 Objectives of Interview
11.2.2 Characteristics of Interview
11.2.3 Qualities of an Interviewer
11.2.4 Steps in conducting the Interview
11.2.5 Types of Interviews
11.3 Surveys
11.3.1 Steps in Conducting Surveys
11.3.2 Types of Surveys
11.3.3 Validity of Interview
11.3.4 Difference between Interview and Questionnaire
11.3.5 Difference between Interview and Observation
11.3.6 Merits of Interview
11.3.7 Limitations of Interview
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Interview is one of the important and powerful tools for the data collection
in business research. The main purpose of the interview is to gather data
extensively and intensively. The interview techniques are usually
administered in person, by telephone, by audio visual, by mail, or by e-
mail. However, from a practical point, the subjective techniques are
administered in person.
LEARNING OBJECTIVES
• discuss the procedure for conducting interview.
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• explain the types of interviews.
• narrate the qualities of an interviewer.
11.1 OBSERVATION
Observation is a systematic way of data collection approach.
Researchers use all of their senses to examine people in natural settings
or naturally occurring situations. Observation of a field setting involves
prolonged engagement in a setting or social situation. Observation
involves three processes, namely sensation, attention, and perception.
11.2 INTERVIEW
An interview is a specialized type of communication, usually verbal,

between two or more people and is carried out for a specific purpose. It is
different from other conversations in that it forms, and purpose is
structured, interviews can be telephone, face to face or over the internet.
Interviewing is one of the major methods of data collection. The term
interview is defined as a two-way systematic conversation between an
investigator and an informant, initiated for obtaining information relevant
to a specific study. It involves not only conversation, but also learning from
the respondent’s gestures, facial expression, and pauses and his
environment.
11.2.1 Objectives of Interview
The objective of an interview is discussed below:
• Collecting information about unknown facts through face-to-face
contracts.
• Collecting information about qualitative facts.
• Aim to collect additional information.
• Provides an opportunity to observe things and people.
• Opportunity to formulate hypothesis.
• It also aims to find the views of others, etc.
11.2.2 Characteristics of Interview
The characteristic of an interview consists of:
• It is a close interaction between two or more people.
• The definite object of an interview is to know the views and ideas of
others.
• The face-to-face contact leads to a primary relationship between the
individuals.
• The data collected for the study of business and social problems.
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11.2.3 Qualities of an Interviewer
The quality of an interviewer involves:
• Attractive personality.
• Pleasing manners.
• Amicable temperament.
• Tact and initiative.
• Active participant without confronting the informant or injuring his
feelings, etc.
11.2.4 Steps in Conducting the Interview
The following steps are useful in the process of conducting an interview:

• Use of narrative method instead of question answer method.
• Least interference and encouragement as and when required.
• Suggestive questions should be avoided.
• Gain the confidence of the interviewee.
• Too much inquisitiveness should be avoided.
• The interview should be unbiased and free from prejudices.
11.2.5 Types of Interviews
The type of interview is as follows:
i. Structured interview – is also known as directive interview. This

interview is conducted with a detailed standardized schedule. Some
questions are put to all the respondents in the same order.
Structured interviews are defined as research tools that are extremely
rigid in their operations are allows very little or no scope of prompting the
participants to obtain and analyze results. It is thus also known as a
standardized interview and is significantly quantitative in its approach.
Questions in this interview are pre-decided according to the required detail
of information. Structured interviews are excessively used in survey
research with the intention of maintaining uniformity throughout all the
interview sessions. They can be closed-ended as well as open-ended –
according to the type of target population. Closed-ended questions can
be included to understand user preferences from a collection of answer
options whereas open-ended can be included to gain details about a
particular section in the interview.
Advantages of structured interviews:
• Structured interviews focus on the accuracy of different responses
due to which extremely organized data can be collected. Different
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respondents have different type of answers to the same structure of
questions – answers obtained can be collectively analyzed.
• They can be used to get in touch with a large sample of the target
population.
• The interview procedure is made easy due to the standardization
offered by structured interviews.
• Replication across multiple samples becomes easy due to the same
structure of interview.
• As the scope of detail is already considered while designing the
interview, better information can be obtained, and the researcher
can analyze the research problem in a comprehensive manner by
asking accurate research questions.
• Since the structure of the interview is fixed, it often generates reliable
results and is quick to execute.
• The relationship between the researcher and the respondent is not
formal due to which the researcher can clearly understand
the margin of error in case the respondent either degrees to be a
part of the survey or is just not interested in providing the right
information.
Disadvantages of structured interviews:
• Limited scope of assessment of obtained results.
• The accuracy of information overpowers the detail of information.
• Respondents are forced to select from the provided answer
options.
• The researcher is expected to always adhere to the list of decided
questions irrespective of how interesting the conversation is
turning out to be with the participants.
• A significant amount of time is required for a structured interview.
ii. Un-structured interview – is also called as non-directive interview. It
is the least structured one. The interviewer encourages the respondent to
talk freely about a given topic with a minimum of prompting or guidance.
The unstructured interview is also called as in-depth interviews;
unstructured interviews are usually described as conversations held with
a purpose in mind – to gather data about the research study. These
interviews have the least number of questions as they lean more towards
a normal conversation but with an underlying subject. The main objective
of most researchers using unstructured interviews is to build a bond with
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the respondents due to which there are high chances that the respondents
will be 100% truthful with their answers. There are no guidelines for the
researchers to follow and so, they can approach the participants in any
ethical manner to gain as much information as they possibly can for their
research topic.
Since there are no guidelines for these interviews, a researcher is
expected to keep their approach in check so that the respondents do not
sway away from the main research motive. For a researcher to obtain the
desired outcome, he/she must keep the following factors in mind:
• Intent of the interview.
• The interview should primarily take into consideration the
participant’s interest and skills.
• All the conversations should be conducted within permissible limits
of research and the researcher should try and stick by these limits.
• The skills and knowledge of the researcher should match the
purpose of the interview.
• Researchers should understand the do’s and don’ts of unstructured
interviews.
Advantages of Unstructured Interviews

• Due to the informal nature of unstructured interviews – it becomes
extremely easy for researchers to try and develop a friendly rapport
with the participants. This leads to gaining insights in extreme detail
without much conscious effort.
• The participants can clarify all their doubts about the questions and
the researcher can take each opportunity to explain his/her intention
for better answers.
• There are no questions which the researcher has to abide by and
this usually increases the flexibility of the entire research process.
Disadvantages of Unstructured Interviews
• As there is no structure to the interview process, researchers take
time to execute these interviews.
• The absence of a standardized set of questions and guidelines
indicates that the reliability of unstructured interviews is
questionable.
• In many cases, the ethics involved in these interviews are
considered borderline upsetting.
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• Learn more: Qualitative Market Research
iii. Telephone interview – refers to interview through telephones. It is
more ideal for collecting data from a geographically dispersed sample
population. It is cheaper to conduct than face to face interviews. This
method is very common is developed countries.
Advantages:
• To find the interviewees it is enough to have their telephone
numbers on hand.
• They are usually lower cost.
• The information is collected quickly.

• Having a personal contact can also clarify doubts or give more
details of the questions.
Disadvantages:
• Many times, researchers observe that people do not answer phone
calls because it is an unknown number for the respondent, or simply
already changed their place of residence and they cannot locate it,
which causes a bias in the interview.
• Researchers also face that they simply do not want to answer and
resort to pretexts such as they are busy to answer, they are sick,
they do not have the authority to answer the questions asked, they
have no interest in answering or they are afraid of putting their
security at risk.
• One of the aspects that should be taken care of in these types of
interviews is the kindness with which the interviewers address the
respondents, in order to get them to cooperate more easily with their
answers. Good communication is vital for the generation of better
answers.
iv. Face to face interview – is conducted with one person or a group of
people at one time. It can be large and more detailed than other types of
study.
Advantages of Face-to-Face Interviews
• Allow for more in-depth data collection and comprehensive
understanding
• Body language and facial expressions are more clearly identified
and understood
• The interviewer can probe for explanations of responses
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• Stimulus material and visual aids can be used to support the
interview
• Interview length can be considerably longer since the participant has
a greater commitment to participate
Disadvantages of Face-to-Face interviews
• Interviews are more time consuming to recruit and conduct
• As a result of timing and travel, face to face interviews can be
expensive
• Interviews can deliver biased responses
• Most carefully vet the respondent’s ability before investing time in
the recruitment process and interview process
v. In-depth interview – is a dialogue between a skilled interviewer and
an interviewee. Such interviews are best conducted face to face, although
in some situations telephone interviewing can be successful.
Characteristics of in-depth interviews
There are many types of interviews, each with its particularities, in this
case the most important characteristics of in-depth interviews are:
a. Flexible structure: Although it is not very structured, it covers a few
topics based on a guide, which allows the interviewer to cover areas
appropriate for the interviewee.
b. Interactive: The interviewer processes the material that is produced
during the interview. During the interaction the interviewer poses
initial questions in a positive manner, so that the respondent is
encouraged to answer. The complete process is very human, and so
less mundane and dull.
c. Deep: Many probing techniques are used in in-depth interviews, so
that results are understood through exploration and explanation. The
interviewer asks follow-up questions to gain a deeper perspective
and understand the participant’s viewpoint.
d. Generative: Often interacting with your target audience creates new
knowledge. For instance, if you are talking to your customers, you
learn more about the purchase behavior. Researchers and
participants present ideas for a specific topic and solutions to the
problems posed.
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Importance of conducting in-depth interviews
As an in-depth interview is a one-on-one conversation, you get enough
opportunities to get to the root causes of likes/dislikes, perceptions, or
beliefs.
Generally, questions are open-ended questions and can be customized
as per the particular situation. The interviewer gets an opportunity to
develop a rapport with the participant, thereby making them feel
comfortable. Thus, they can bring out honest feedback and also note their
expressions and body language. Such cues can amount to rich qualitative
data.
With surveys, there are chances that the respondents may select answers
in a rush, but in case of in-depth interviews it’s hardly the worry of
researchers.
Conversations can prove to be an excellent method to collect data. In fact,
people might be reluctant to answer questions in written format, but given
the nature of an interview, participants might agree to give information
verbally. You can also discuss with the interviewees if they want to keep
their identity confidential. In-depth interviews are aimed at uncovering the
issues in order to obtain detailed results. This method allows you to gain
insight into the experiences, feelings and perspectives of the
interviewees.
When conducting the initial stage of a large research project, in-depth
interviews prove to be useful to narrow down and focus on important
research details. When you want to have the context of a problem, in-
depth interviews allow you to evaluate different solutions to manage the
research process while assisting in data analysis.
Steps to conduct in-depth interviews
• Obtain the necessary information about the respondents and the
context in which they operate.
• Make a script or a list of topics you want to cover. This will make it
easy to add secondary questions.
• Schedule an interview at a time and date of the respondent’s choice.
• Ask questions confidently and let the interviewees feel comfortable,
so that they too are confident and can answer difficult questions with
ease.
• Set a maximum duration such that it doesn’t feel exhaustive.
• Observe and make notes on the interviewee’s body expressions and
gestures.
• It is important to maintain ethics throughout the process.
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• Transcribe the recordings and verify them with the interviewee.
Advantages of in-depth interviews
The benefits of conducting an in-depth interview include the following:
• They allow the researcher and participants to have a comfortable
relationship to generate more in-depth responses regarding
sensitive topics.
• Researchers can ask follow-up questions, obtain additional
information, and return to key questions to gain a better
understanding of the participants’ attitudes.
• The sampling is more accurate than other data collection methods.
• Researchers can monitor changes in tone and word choice of
participants to gain a better understanding of opinions.
• Fewer participants are needed to obtain useful information.
• In-depth interviews can be very beneficial when a detailed report on
a person’s opinion and behavior is needed. In addition, it explores
new ideas and contexts that give the researcher a complete picture
of the phenomena that occurred.
Disadvantages of in-depth interviews
The disadvantages of in-depth interviews are:

• They are time-consuming, as they must be transcribed, organized,
analyzed in detail.
• If the interviewer is inexperienced, it affects the complete process.
• It is a costly research method compared to other methods.
• Participants must be chosen carefully to avoid bias, otherwise it can
lengthen the process.
• Generally, participants decide to collaborate only when they receive
an incentive in return.
vi. Focus groups – are made up from a number of selected respondents
based together in the same room. The highly experienced researchers
work with the focus group together in-depth qualitative feedback. The
group tends to be made up from 10 to 18 participants. Discussion, opinion
and beliefs are encouraged, and the research will probe into specific areas
that are the interest of the company.
Best practices for focus group research:
The Following five steps to create a market research focus group.
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a. Have a clear plan for focus group members: The goal of the group
must be clear before approaching participants to join. For example,
does the researcher intend to discuss new products or the effect of
current marketing campaigns? Use a written explanation to clarify
the objective to members.
b. With a plan in place, begin writing your focus group survey
questions: Questions should align with the research objective and
complement one another. Start the discussion with the most crucial
issues and end with the least important. Asking open-ended
questions increases the effectiveness of your research.
c. Schedule the time, place, and duration of the discussion: Be sure to
let members know in advance so that they can plan accordingly.
d. You can host a focus group in person or through an online
community: Offline groups meet at a physical location to conduct the
discussion in person. An in-person event requires a venue that
includes bathrooms and refreshments, so participants are
comfortable. On the other hand, online focus groups meet virtually
through an online discussion platform. Invitations and reminders for
online discussions need to be sent out several times before the
event. This helps participants to remember your online event.
e. Create informational brochures or forum posts with a welcome note,
the meeting agenda, and overall rules of the discussion.
Main pillars of a focus group:
Participants: A crucial step in conducting a focus group is the process of
participant selection. The main criterion for selecting the participants must
be their knowledge about the subject. If you need help selecting members,
look for a research-based organization that matches you with qualified
participants.
The role of a moderator: The moderator conducts the group with
confidence and leads members through the questions. They must be
impartial throughout the process. As the researcher, you can also be the
moderator, so long as you remain objective. You can also hire a suitable
professional moderator to run your focus group survey.
Types of focus groups
The focus group depends on the needs of your research. Types include:
• Dual-moderator focus group: There are two moderators for this
event. One ensures smooth execution, and the other guarantees the
discussion of each question.
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• Two-way focus group: A two-way group involves two separate
groups having discussions on the topic at different times. As one
group conducts their study, the other group observes the discussion.
In the end, the group that observed the first session performs their
conversation. The second group can use insights gained from
watching the first discussion to dive deeper into the topic and offer
more perspective.
• Mini focus group: This type of group restricts participants to 4-5
members instead of the usual 6-10.
• Client-involvement focus group: Use this group when clients ask
you to conduct a focus group and invite those who ask.
• Participant-moderated focus group: One or more participants
provisionally take up the role of moderator.
• Online focus group: These groups employ online mediums to
gather opinions and feedback. There are three categories of people
in an online panel: observer, moderator, and respondent.
Focus group advantages:
• A great complement to other mediums like online
surveys and online polls. Focus groups give you access to why a
customer feels a certain way about a product, and surveys help you
collect supporting feedback in large batches.
• Immediate access to customer opinions, making data collection, and
analysis quick and convenient.
• Highly flexible to adapt to the needs and opinions of the group
members.
• Easy to conduct regular discussions to eliminate inaccurate results
due to current market outlooks.
• Focus groups are perfect sources to understand the true feelings
and perceptions of your selected target audience.
vii. Projective interview – the technique of inferring a subject’s attitudes
or values based on the researcher’s description of vague objects requiring
interpretation. The projective techniques are more popular in the field of
psychology. They will generate highly subjective qualitative data.
Examples of projective techniques are, inkblot test, word association test,
story completion test, etc.
Projective Interviewing Techniques
Some of the commonly used projective interviewing techniques

include:
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Collages – Participants are asked to draw or clip images from magazines
that they associate with a brand or product. Each participant then uses
the drawings/images to build a collage.
Role Playing – Participants are asked to play the role of someone else.
Sentence Completion – Participants are given incomplete sentences

and asked to complete them.
Laddering – An in-depth interview which begins with questions about

external topics (social trends, etc.) and then proceeds (or “ladders”) to
questions about internal attitudes and feelings.
Benefits of Projective Interviewing

A key benefit of Projective Interviewing is that it overcomes the
clinical nature of focus groups and interviews by building a bridge
to past experiences. Specifically, it allows participants to access
and report feelings and motivations that may not surfa ce using
more rational question and answer interviewing techniques. It can
also be used to stimulate non-linear or lateral thinking in order to
elicit new ideas.
viii. Omnibus studies – is where an organization purchases a single or
a few questions on a hybrid interview ( ie. either face to face interview or
by telephone interview). The organization will be one many that simply
want to straight forward answer to a simple question. This technique are
for cheaper, less time consuming and effort than conducting own
research.
ix. Clinical interview – is concerned with broad underlying feeling or

motivations or with the course of the individual’s life experiences.
11.3 SURVEYS
A survey is a research technique in which data is systematically collected

directly from the people being studied by the questionnaire. Surveys are
a form of questioning that is more rigid than interviews and that involve
large group of people.
11.3.1 Steps in Conducting Surveys
Usually, the following steps are followed in conducting a survey. They are:
• Establish the goals of the survey.

• Determine the sample size.
• Choose the interview methodology.
• Develop your questionnaire.
• Pre-test the questionnaire.
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• Conduct interviews and enter-data.
• Analyse the data.
• Produce the report.
11.3.2 Types of Surveys
The following types of survey methods are used in business research
studies.
i. Mail survey – is a method of collecting information by sending
surveys via postal mail. The respondents answer the questions at
their leisure time. The participants return completed forms to the
researcher.
ii. Telephone survey – when the time is short, and distance is far away
the researcher will ask the research questions through phone. It is
the most popular interview method in advanced countries.
iii. Email survey – e-mail surveys are both very speedy and economical
one. The e-mail surveys are limited to simple questionnaires
whereas web page surveys can include complex.
iv. Web page survey – it is also termed internet or intranet surveys. In
webpage survey the questionnaire is posted on a popular website
and can gather large number of respondents, response within a few
hours. It is extremely more speed, less expensive and flexible.
v. Panel data – A panel is a group of study units that exist over time
and form which data is collected on a regular interval of time. The
study units may be households, institutions, organizations, etc.
Usually, the panels are sponsored by some commercial houses and
maintained by some marketing research agencies. Example, ITC
operates a consumer panel on cigarettes; ORG maintains a retail
store panel, etc.
11.3.3 Validity of Interview
The following precautions are to be taken to avoid errors in interview:
• The interviewer must examine the cause and effect of the relevant
aspects of the interview.
• The researcher should examine data from other sources also.
• The researcher must know about the respondents and their
attitudes.
• Resorting to group interview.
• The researcher must cross check the statement that might have
been secured earlier.
• The interviewer must try to collect extensive facts about the
important aspects.
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11.3.4 Difference between Interview and Questionnaire
The difference between interview and questionnaire is as follows:
S.No Interview Questionnaire
1. It involves oral verbal It involves presentation of

response. written-verbal stimuli and return
of written verbal response
2. It requires an opportunity for The non-verbal attitudes are

greater care in nodding, clapping,
communication questions. manipulating things, smiling,
etc.
3. It is conducted to assess the It is conducted through phone

subject and background or in person.
knowledge
11.3.5 Difference between Interview and Observation

The difference between interview and observation is as under:
S.No Interview Observation
1. The interview technique is The observation techniques are

mostly verbal. restricted mostly for non-verbal
attitudes.
2. The interview technique It contains the questions and

aims to trace out both the arranges to get information.
tacit and explicit knowledge
3. It also reflects how the It also reveals that how the non-
interviewee react the verbal attitudes arise.
situation.
11.3.6 Merits of Interview
The relative merit of an interview includes:

• The interview helps to study business events as well.
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• The interview helps to study the abstract factors like attitude,
feelings, emotions, reactions, etc. of the respondents.
• The information collected through the interview method is quite
reliable.
• The interview also helps to study past events.
• The interview is more useful to the entire segments of the
population.
11.3.7 Limitations of Interview
The limitations of the interview method is enumerated below:
• The data collected is doubtful in nature.
• It leads to personal bias and prejudices of the interviewer.
• It is not possible to have both the interviewer and the interviewee
from the same background.
• It is not possible to get specialized knowledge-oriented people.
• It leads to too many emotions and sentiments.
• It also leads to an inferiority complex among the interviewees.
LET US SUM UP
Let us sum up, an interview is a specialized type of communication,
usually between two or more people and is carried out for a specific
purpose. It can be organized through face to face, telephone or over the
internet, moreover, we also discussed qualities of an interviewer, steps in
conducting interview, types of interviews, surveys, types of surveys,
difference between interview and questionnaire, etc. this lesson will give
a very good insight to the readers.
CHECK YOUR PROGRESS
1. A researcher wants to study the association between gender and
using a mobile phone. Data collected for the will be
a) Quantitative data
b) Qualitative data
c) Continuous data
d) Classified data
2. ________ includes data concerning the family background and
educational development.
a) Case study
b) General behavior
c) Genetic approach
d) Adequacy
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3. Which one of the following is a type of self-reporting technique?
a) Field analysis
b) Questionnaire
c) Case study
d) Focus groups
4. Which one of the following stages of the marketing research process
is most expensive?
a) Data analysis
b) Data collection
c) Developing the research plan
d) Report writing
5. Which one of the following is NOT a method of primary data
collection?
a) Interview
b) Questionnaire
c) Delphi method
d) Documents
GLOSSARY
Interview is a qualitative research method that relies on

asking questions in order to collect data.
Research Data is any information that has been collected,

observed, generated or created to validate
original research findings
Delphi Technique is a well-established approach to answering a

research question through the identification of a
consensus view across subject experts
Observation is a research technique where you observe

participants and phenomena in their most
natural settings.
SUGGESTED READINGS
133
House, Mumbai.
Hill, New Delhi,
McGraw Hill, India
India
WEB RESOURCES
1. Research Methodology | Schedule method of data collection |
Lecture 5 - YouTube
2. Research Methods - Interview - Bing video
3. What makes a good interview? - Advanced qualitative methods -
Bing video
4. 3:2 Introduction to Qualitative Research: Conducting interviews -
YouTube
1. B) 2. A) 3. b) 4.b) 5. d)
134
UNIT 12
PILOT STUDY AND PRE-TESTING
STRUCTURE
Overview
Learning Objectives
12.1 Pilot study
12.1.1 Need for Pilot Study
12.1.2 Role of Pilot Study in identifying the variables
12.1.3 Advantage of Pilot Study
12.2 Pre – Test / Pre - Testing
12.2.1 Need for Pre-Testing
12.2.2 Pre-Testing Procedure
12.2.3 Importance of Pre-testing
12.2.4 Advantages of Pre-testing
12.2.5 Consequences of Defective Instrument
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The literature review has been carefully studied and experts consulted,
the researcher may still have only a rather vague idea of what the crucial
elements in his problem area. A pilot study or survey as sometimes called
may then be launched as a preliminary step to the formation of a schedule
or questionnaire. The pre-testing is the stage in survey research when
survey questions and questionnaires are tested with experts of the target
population to evaluate the reliability and validity of the survey instruments
prior to final data collection.
LEARNING OBJECTIVES

• gain knowledge on need for pilot study
• explain the pilot study on identifying variables
• discuss the importance of pre-testing
135
12.1 PILOT STUDY
Pilot Study refers to a preliminary study conducted on a limited scale
before the original studies. In other words, pilot study is the rehearsal of
the main study. It covers the entire process of research, preparation of a
broad plan of the study, construction of tools, collection of data,
processing and analysis of data and report writing.
12.1.1 Need for Pilot Study
It is difficult to plan a major study or project without adequate knowledge
of its subject matter, the population it is to cover, their level of knowledge
and understanding and the like. In order to gain such a pre-knowledge of
the subject matter of the extensive study, a preliminary investigation is
required. This process is termed pilot study.
12.1.2 Role of Pilot Study in identifying the variables
The pilot study enables the researcher to gain some systematic
knowledge of the universe and its population, on which would be based
the main or principal study. So it plays an important role on identifying the
various variables involved in research, the nature of problem, the nature
of problem, the nature of respondents, possible difficulties in the
procedure of interview, kind of response that are likely to be available, etc.
on the basis of the information gathered or experience gained during such
a study, the questionnaire or schedule is then framed. Such a
questionnaire or schedule shall be very realistic and meaning full. It also
provides the following information:
• The adequacy of the sampling frame.
• The variability within the population to be surveyed.
• The non-response rate to be expected.
• The suitability of the method of collecting data.
• The adequacy of instrument, accuracy, clarity, and efficiency.
• The kind of interviewer and respondent.
• The efficiency of the instructions and general briefing of interviews.
• To decide upon the alternative answers to be answered for coding.
• The estimated cost and duration of the main study of its various
stages.
12.1.3 Advantage of Pilot Study
The advantages of pilot study are:
• Pilot study provides a better knowledge of the problem under study
and its dimensions.
136
• Pilot study provides guidance on identification and
operationalization of concepts relating to the study.
• Pilot study assists in discovering the nature of relationship
between variables and in formulating hypothesis.
• Pilot study has shown the nature of sample of the population to be
surveyed and the variability with it.
• Pilot study provides data on relative suitability of alternative
methods of collection of data on observation, mailing interviewing,
etc.
• Pilot study also provides their relative cost, accuracy and response
rates to make a sensible choice.
• Pilot study has shown the adequacy of the tool for data collection.
• Pilot study also helps in discovering mechanical problems relating
to interviews.
• Pilot study assists in developing better approaches to target
population.
• Pilot study provides information for structuring questions with
alternative answers.
• Pilot study helps the researcher to develop an appropriate plan of
analysis.
• Pilot study enables the researcher to identify field problems to be
encountered and suggest remedial approaches.
• Pilot study provides information for estimating the probable cost
and duration of the main study and of its various stages.
• Pilot study also assists the researcher can be able to take a
pragmatic view on the main study’s potentialities and feasibility.
In the light of the outcome of pilot study, if it is found that the main study
is work undertaking, then it is adequately designed on the basis of the
results of the pilot study and the lessons drawn from its experience.
12.2 PRE - TEST / PRE - TESTING
Pre-Test is the trail test of a specific aspect of the study such as method
of data collection or data collection instrument – interview schedule,
questionnaire, and measurement scale or mail questionnaire. In other
words, pre-testing or preliminary testing is the process of an advance
testing of the study design after the questionnaire or schedule has been
prepared. The main object of pre-testing is to detect the discrepancies
that have crept in and to remove them after necessary modifications in the
questionnaire or schedule.
137
12.2.1 Need for Pre-Testing
An instrument of data collection is designed with reference to the data
requirements of the study. But it cannot be perfected purely on the basis
of critical scrutiny by the designer and other researchers. Hence, it should
be empirically tested. The pre-test responses should be carefully
examined and analysed in order to identify the weakness of the
instrument. Hence, the pre-testing gives a trial administration of the
instrument to a sample of respondent before finalizing it
12.2.2 Pre-Testing Procedure
A broad guideline is suggested before for pre-testing of an instrument.
The first testing of a draft instrument can be done among one’s colleagues
in order to find out its shortcomings. After this in-house testing, it should
be revised and tested in the field. The instrument maybe administered to
5% (or) 20 to 30 of the sample respondents drawn from the universe
relating to the planned study. They may be interviewed, or copies of the
instrument mailed to them, depending on the method selected for data
collection. Then the copies of the draft questionnaires may be handed
over to a few respondents with a request to complete them to comment
on question clarity and other aspects of the questionnaire. This appeal for
advice may elicit their co-operation and the researcher can get
constructive suggestions for revising the questionnaire. Whatever the
mode of pre-testing, it is important to conduct the field test under a actual
field conditions.
12.2.3 Importance of Pre-testing
The pre-test gives significant information on the following aspect.
• Pretest gives relative population size
• Pretest provides sources and patterns of variability
• Pretest gives adequacy and accuracy of secondary data
• Pretest provides distribution an important study characteristic
• Pretests help to inform physical accessibility, distance, modes of
transportation
• Pretest examines time and material resources required at all
stages of the project
• Pretest reveals that the supervisors and interviewers, training
curriculum deficiencies.
• Pretest given the sample disposition of households and
respondent rates and reasons for non-response.
• Pretest helps to overcome the customs and practices to overcome
in respondent selection.
138
• Pretest also helps to use types and levels of measurement.
12.2.4 Advantages of Pre-testing
The advantages of pre-testing involve:
• Pretest reveals the strengths and weakness of the questionnaire
• Pretest helps to decide questionnaire form and structure
• Pretest helps to resolve many problems in measurement
• Pretest assists to improve the design and effectiveness of the
questionnaire.
• Pretest provides the estimates of required resources for the
survey.
• Pretests also assist in developing appropriate procedures for
administering the instrument with reference to field condition.
12.2.5 Consequences of Defective Instrument
The following indicators are revealed by a defective instrument during the
pre-testing:
• Lack of order in the responses

• All or non-responses
• A large number of do not know the answers
• Many qualified answers to irrelevant opinions
• High proportion of refusals to answer
• High degree of variance in answers when the question order is
changed.
• Similar types of people giving different types of replies.
• Answers differing known answers
• In case of questionnaire refusal to answer it
• Marginal comments of interviewers or respondent concerning
particular questions.
LET US SUM UP
Let us sum up this lesson, the term pilot study covers the entire process
of research, parathian of a broad plan of the study, construction of tools,
collection of data, processing and analysis of data and report writing.
Moreover, we have discussed the relative advantages of pilot study in
research. Pre-testing is the preliminary testing of a specific aspect of the
study such as method of data collection, data collection instrument,
questionnaire or interview schedule or measurement scale. Besides, the
need and procedure for the pre-testing and its relative importance and
advantages are also discussed. Hence, it will be a eye-opener to the
readers on the pilot study and pre-testing.
139
CHECK YOUR PROGRESS
1. If the researcher is not familiar with research problems, then which stud
is conducted to acquire knowledge of the subject?
a) Pre-testing
b) Pilot-study
c) Detailed study
d) Analytical study
2. Pre-testing helps in
a) Formulation of schedules and questionnaires
b) Improvement of schedules and questionnaires.
c) Revealing the strengths and weakness schedules and
questionnaires
d) All of the above
3. All full fledge miniature study of research problem is called:
a) Pre-testing
b) Pilot-study
c) Detailed study
d) Analytical study
4. A ___________________ is conducted to detect weaknesses in
research instrument’s design.
a) Pilot study
b) Questionnaire
c) Interview
d) Sampling
5. A small-scale research project that gathers data from respondents
similar to those to be used in the whole study is known as
a) Absolute causality
b) Pretest
c) Literature review
d) Pilot study
GLOSSARY
Pilot Study : is a 'small study to test research protocols, data

collection instruments, sample recruitment
strategies, and other research techniques in
preparation for a larger study
Pre-test : is the stage in survey research when survey

questions and questionnaires are tested on
members of target population, to evaluate the
140
reliability and validity of the survey instruments
prior to their final distribution.
SUGGESTED READINGS

McGraw Hill, India
House, Mumbai.
4) Mukul Gupta & Deepa Gupta (2013), Research Methodology, latest
India
7) Vohra, N.D., (2017) Business Statistics, latest Edition, McGraw Hill,
New Delhi,
WEB RESOURCES
1. Pilot study and pre-test - Bing video
2. Pilot Study - Bing video
3. Pilot Study and Pre Testing of Research Instrument - Bing video
1.b) 2.d) 3.b) 4.a) 5.d)
141
UNIT 13
DATA PROCESSING
STRUCTURE
Overview
Learning Objectives
13.1 Data Processing
13.1.1 Questionnaire Checking
13.2 Editing
13.2.1 Guidelines to Editors
13.3 Coding
13.3.1 Rules of Coding
13.3.2 Editing of Data Vs Coding of Data
13.3.3 Classification of Data Vs Coding of Data
13.3.4 Classification Vs Sampling
13.4 Classification of Data
13.4.1 Objectives of Classification
13.4.2 Classification and its types
13.5 Content Analysis
13.6 Transcription
13.6.1 Methods of Transcription
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Once the data collection is over, the data has to be prepared for analysis.
The collected data is raw, and it must be converted to the form that is
suitable for the required analysis. So, proper data presentation is a must
to get reliable results. In this lesson we go for discuss, questionnaire
checking, editing, coding, classification, content analysis, transcription,
etc.
LEARNING OBJECTIVES

• explain the classification of data
• discuss the data processing
• distinguish between editing of data and coding of data
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13.1 DATA PROCESSING
When the data collection is over, the next step is to arrange the data or
information for processing and analysis of the data. The data collected is
to be processed with a view to reducing them to manageable proportions,
only by such a careful and systematic processing, the data collected will
give statistical application and meaningful inference to formulation of a
theory or finding. Then the data processing comprises editing, coding,
classification and tabulation, is an intermediary stage between the data
collection and their analysis and interpretation.
13.1.1 Questionnaire Checking
When the data collection is over, the preparation process is to check the
questionnaires, if they are acceptable or not, it involves the examination
of all the questionnaires for their completeness and interviewing quality.
The incomplete, inadequate knowledge, the respondent could not
understand the questions, etc. are not accepted for processing.
13.2 EDITING
Editing is the process of examining the data collected in questionnaires or
schedules to detect errors and omissions and to verify that they are
corrected, and the schedules prepared for tabulation. According to
Mildred B. Parten defines, editing refers to the editor is responsible for
data, “as accurate as possible, consistent with other facts secured,
uniformly entered as complete as possible, acceptable for tabulation and
arranged to facilitate coding and tabulation.
13.2.1 Guidelines to Editors
Usually following guidelines are followed by the editor:
i. The editor should be familiar with editing instructions
ii. The editor should not destroy, erase or make illegible the original
entry of the interviewer.
iii. Make all entries on a questionnaire in a standardized form.
iv. All answers changed or supplied by the editor should be initialed.
v. The editor should be placed his initials and data on every
questionnaire completed.
13.3 CODING
Coding refers to the process of assigning numerals or other symbols to
answers so that responses can be put into a limited number of categories
or classes. Such classes should be appropriate to the research problem
under consideration. It is necessary for efficient analysis and through
several replies may be reduced to a smaller number of classes which
143
contain the critical information required for analysis. So, coding decisions
should usually be taken at the designing stage of the questionnaire.
13.3.1 Rules of Coding
The rule for coding consists of:
• Assign code numbers for each respondent for identification.
• Assign code number for each question.
• Assign code numbers for each response.
• Assign code numbers for qualitative responses also.
• Do not delegate the work of categorization to others.
• Coding of open questions – is always very difficult. So, clarify each
response according to the basic content and code them
accordingly and
• Coding no opinion responses – means neutrality. In such cases,
give a number for such a response and accordingly proceed with
the analysis.
13.3.2 Editing of Data Vs Coding of Data

Both editing and coding is differentiated in the following lines.
S.No Editing of Data Coding of Data
1. It is a post survey work It can be done before survey
2. It checks accuracy and It helps to quick processing of
consistency data
3. It is done at field survey stage It can be done any time
or post survey stage
4. It is a process of error The respondents’ replies are
elimination assigned a code
5. It is a preparatory process of It helps to computerized
classification and tabulation processing
13.3.3 Classification of Data Vs Coding of Data

The classification of data and coding of data differs on the following lines:
S.No Editing of Data Coding of Data
1. It involves grouping data into It is a process of analyzing

homogenous classes heterogeneous responses into
some categories
2. Classification follows coding Coding is done before

classification
144
3. The available data is sorted The symbols, numerals, marks,
GroupWise on the basis of etc are assigned to each answer
similarities and resemblance of the questionnaire.
13.3.4 Classification Vs Sampling

Both classification and sampling are differentiated as follows:
S.No Classification Sampling
1. It refers to the data are It refers to selecting is small

converted into portion of the population for
survey proposes
2. It helps to make the data It makes the survey cost and

manageable time effective
3. It is done after data It is done before data collection

collection
4. It facilitates data analysis It facilitates data collection
5. The methods used are, The methods used are random

geographical chronological, and non-random sample
qualitative, quantitative, etc.
13.4 CLASSIFICATION OF DATA

The data collected by the investigator after interview, observation, survey
or any other method are in its draw form. This in a group jumbled shape
and no inference can easily be drawn from it in-order to make the collected
data useful for research, the process of classification starts. Through this
classification it can be tabulated, and generalization can be based on it.
Classification may be defined as the process of arranging things in groups
or classes, according to their resemblance or affinities and gives
expression to the unity of attributes that may subsist among the diversity
of individuals.
13.4.1 Objectives of Classification
The objectives of classification are:

• The classification aims to make the jumbled man arranged into a
concise, logical and intelligence order.
• The classification is possible to make the characteristics of
similarities.
• The classification helps to make comparative study
• The classification also aims to understand the significance easier
145
• The data so arranged that analysis and generalization become
possible.
• The classification also saves time and effort.
13.4.2 Classification and its types
The classification and types of data are:
• Qualitative basis – refers to grouping the data on the basis of
attributes or qualities
• Quantities basis – refers to the way of groups the variables in a
coherent group
• Periodical basis – denotes the data belonging to a particular time or
period put in one classis
• Geographical basis – the data as be collected from different places
or placed in different classes.
13.5 CONTENT ANALYSIS
Content analysis is a research technique for inferring the characteristics,
causes and effects of communications. According to Pauline V. Young,
content analysis is a research technique for systematic, objective and
quantitative description of content of research procured through
interviews, questionnaires, schedules and other linguistic expressions,
written or oral. It means categorization or classification of data into
different categories or groups.
The objective of content analysis is to convert recorded raw information
into data which can be treated essentially in a scientific manner so that a
body of knowledge may be built up. Through content analysis the following
three aspects are observed. They are:
• Comprehensive analysis of sample
• The preliminary choice of categories and
• Classifying and processing the results.
13.6 TRANSCRIPTION
The editing and coding is over, the data are ready for analysis. The data
are available in the questionnaire or schedules. For the requirements of
analysis, they are to be tabulated. If the numbers of respondents are small
50 to 60 and the number of tables required are also small. If the numbers
of respondents are large, the numbers of tables are large and also a lot of
cross tables are to be prepared, direct tabulation is extremely difficult.
Now the transcription facilities make tabulation easier. So, transcription
means posting the data from the questionnaire or schedule on an
intermediary material in a summarized form.
146
13.6.1 Methods of Transcription
The methods of transcription are:
i. Listing or List and Tally Method – under this method, a long sheet,
double foolscap size, map drawing size issued on the sheet as may
columns are drawn as possible on the top of each columns the code
number of the question is entered. For each question, the number of
entries which a code number will be the frequency of the answer. If
more pages are used every page is totaled. Generally, a single page
is used for this purpose.
ii. Card Sort and Count Method – under this method, a thick card with
columns printed on the edges is used for each questionnaire or
schedule. Each column has a number. Therefore, a lot of code
numbers for each question or variables. Enter the code number or
value of the response in the concerned column. Almost 40 columns
can be printed on each side. So, a total of 80 responses can be
entered. It helps to the tabulation easier.
iii. Strep Method – in this method, long strip of one inch width is used in
this method. Each strip has 160 columns printed on each side. Thus,
responses relating to 320 items can be recorded in one strip. The strip
can also be rolled and made easy for handling. Strips are useful for big
projects with a large number of items.
iv. Punch Card Method – these methods in used for data analysis
through computer. Each card has numbers 0 to 80 in the column and
0 to 9 in rows. Thus, data relating to 80 items can be recorded, if easy
response can be recorded in the single digit against each column the
appropriate response number is punched. For responses with more
than one digit, the required number of columns can be used. If the
number of items exceeds more than one card can be used. However,
direct punching cards would be possible only when the questionnaire
or schedule is pre-coded. The first three methods are useful for hand
tabulation, and the method is used for computer-based tabulation.
LET US SUM UP
Let us summarize this unit, once the data collection is over, the data has
to be prepared for analysis. The collected data is raw, and it must be
converted to the form that is suitable for required analysis. So, proper data
presentation is must to get reliable results. Under this process, we have
discussed data processing, editing, coding, classification, content
analysis, transcription, etc. This will give a very good understanding to the
readers on data processing.
147
CHECK YOUR PROGRESS
1. Which are the types of tables in data processing?
a) Simple table
b) Complex table
c) Only b
d) Both a and b
2. Following are parts in the tabulation of data
a) Title of the table
b) Subheadings, arrangement of items in rows and columns
c) Size, demarcation of columns and Footnotes
d) All the above
3. After the data has been processed and analysed, the research process
requires:
a) Interpretation of data
b) Presentation of data
c) Reporting of data
d) Testing of data
4. Data processing involves the following steps:
a) Editing
b) Coding
c) Classification and Tabulation
d) All of the above
5. If data has been recorded using technical media, which among the
following is a necessary step on the way to its interpretation?
a) Transcription
b) Structural equation modelling
c) Sequential analysis
d) Sampling
GLOSSARY
Coding : Coding is a process of identifying a passage in

the text or other data items, searching and
identifying concepts and finding relations
between them.
Editing : is the process of examining the data collected in

questionnaires/schedules to detect errors and
omissions and to see that they are corrected and
the schedules are ready for tabulation.
148
Checking : is a qualitative technique used to establish the
tenet of credibility in trustworthiness.
Content : is a research tool used to determine the

analysis presence of certain words, themes, or concepts
within some given qualitative data
Transcription : Is a methodology where skilled transcribers

convert audio into text using various techniques
and software
SUGGESTED READINGS
McGraw Hill, India
House, Mumbai.
4) Mukul Gupta & Deepa Gupta (2013), Research Methodology, latest
India
7) Vohra, N.D., (2017) Business Statistics, latest Edition, McGraw Hill,
New Delhi,
WEB RESOURCES
1. Data Processing Methods | AL ICT | Unit 1 | Concept of ICT |
Tamil | தமிழில் - Bing video
2. Data processing in Tamil - YouTube
3. DATA PROCESSING IN RESEARCH (Research Methodology -
16) - Bing video
1.d) 2.d) 3. a) 4.d) 5.a)
149
UNIT 14
TABULATION OF DATA
STRUCTURE
Overview
Learning Objectives
14.1 Tabulation - meaning
14.1.1 Objectives of Tabulation
14.1.2 Nature of Tabulation
14.2 Types of Tables or Tabulation
14.2.1 On the Basics of Characteristics
14.2.2 On the basics of Information
14.3 Steps in preparation of Table
14.4 General principles of Tabulation
14.4.1 Methods of Tabulation
14.4.2 Rules for Determining Class Intervals
14.4.3 Difference between Hand Tabulation and
Machine Tabulation
14.5 Grouped and Ungrouped Data
14.6 Advantages of Tabulation
14.7 Limitations of Tabulation
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Tabulation is a part of the technical process in the statistical analysis of

data. Analysis of data is made possible through tables. Therefore,
preparing tables is a very important step. Tabulation may be by hand,
Mechanical or electronic. If the questionnaire is small and their length
short, hand tabulation is quite satisfactory. The choice is made largely on
the basis of the size and type of study alternative cost, time pressures and
the availability of computer programmes, In this lesson we will discuss,
tabulation, objectives of tabulation, nature of general principles, methods,
grouped and ungrouped data.
150
LEARNING OBJECTIVES
• point out the need for tabulation
• explain the methods of tabulation
• discuss the rules for determining class-intervals.
14.1 TABULATION – MEANING
Tabulation is the process of summarizing raw data and displaying it in
compact form for further analysis. A tabulation involves the arbitrary and
systematic presentation of numerical data in a form designed to elucidate
the problem under consideration. According to gosh and chowdhri
defined, tabulation stands for the systematic and scientific presentation of
quantitative data in such a form as to elucidate the problem under
investigation.
Table means recording in permanent form and analysis that is made
through classification and of placing the right position things that are some
and to be compared. According to Neiwanger has defined as table is a
systematic organization of data in columns and rows.
14.1.1 Objectives of Tabulation
The objective of tabulation is:

• To clarify the purpose of investigation.
• To make the significance of data.
• To present data, the least possible space.
• To enable comparative study.
• To fit the data for final statistical analysis.
14.1.2 Nature of Tabulation
The nature and characteristics of tabulation are:
• The data are simplified and presented in a manner.
• It aims to easy study and compare.
• It also saves money and energy.
• It saves space and time.
14.2 TYPES OF TABLES OR TABULATION
Types and kinds of tabulation depend upon their specific characteristics.
Normally speaking, tables which form the basis of tabulation may be
divided into two types. They are on the basis of characteristics and on the
basis of information.
151
14.2.1 On the Basics of Characteristics
On the basis of characteristics, the tables are classified as under:
i. Simple table simple tabulation – consists of information about one or
more groups are given.
ii. Complex tabulation or table – is just the reverse of simple tabulation.
iii. General purpose table of tabulation – the tables as the name itself
indicate the general information about the entire data collected.
iv. Summary table / tabulation – these tables are small in size in
comparison to the general-purpose table and they are called
summary tables.
14.2.2 On the basics of Information
The tables provide information about independent questions and also
about various, related questions. They are also classified into:
i. One way Table – in fact these types to table in very simple. In this
type of table data of only one characteristics are shown.
ii. Two-way Tables – provide information about a particular aspect of
the information. it means that when two mutually related attributes of
a phenomenon are to be displayed or shown two-way tabulation has
to be resorted to.
iii. Three-way Tables – which display three types of attributes. Since
three attributes or characteristics are to be displayed, it is termed as
three-way tables.
iv. Manifold Tables – when information about different mutually related
attributes of a phenomenon is to be displayed, manifold table is
resorted to.
14.3 STEPS IN PREPARATION OF TABLE
As a general rule the following steps are necessary in the preparation of
the table:
• Title of Table
• Columns and Rows
• Clear Captions and Stabs
• Ruling
• Arrangements of Items – Alphabetical, Numerical, Magnitude,
Historical.
• Derivations
• Size of Columns
• Special Emphasis
• Unit of measurement
152
• Approximation
• Footnotes
• Total
• The large and complex tables may be placed at the end of the
chapter or report.
14.4 GENERAL PRINCIPLES OF TABULATION
The generally accepted principles of tabulation include.
• Every table should be clear, concise and adequate.
• Every table should be given a district number to facilitate easy
reference.
• The column headings and the row headings of the tables should
be clear and brief.
• The units of measurement must always be mentioned.
• Explanatory footnotes.
• Sources from where the data in the tables have been obtained
must be indicated.
• Usually, the columns are separated from one another by lines
which make the table more readable.
• These should be thick lines to separate the data under one class
from the data under another class.
• The columns may be numbered to facilitate reference.
• These columns whose data are to be compared should be kept
side by side.
• It is generally considered better to approximate figures before
tabulation.
• It is important that all column figures be properly signed.
• Abbreviations should be avoided to the extent possible.
• The table should be made as logical, clear, accurate and simple
as possible.
• The total row should normally be placed in the extreme right
column and that of columns should be placed at the bottom.
• The arrangement of the categories in a table may be chronological,
geographical, alphabetical or according to magnitude to facilitate
comparison.
• Above all, the table must suit the needs and requirements of an
investigation.
14.4.1 Methods of Tabulation
Generally, the tables are drawn through the following two methods. They
are hand tabulation and mechanical method of tabulation.
153
i. Hand Tabulation – When the survey is a small sample survey and a
few questionnaires are filled in, it is simple sort them out of manually
in score sheets or tally sheets. Preparation of scores or tally sheets
is done by selecting figures of different classes and putting them
down on separate sheets of paper. The basic thing that is to be done
is to determine classes into which the data are to be grouped. After
the number of frequencies of group is determined by putting score
marks and counting them. When four straight lines have been
completed the fifth line shall be drawn across the four lines so that
there may be no difficulty in counting them. This would facilitate the
tabulation.
ii. Mechanical Method of Tabulation – Tabulation when done by
machine is called mechanical tabulation. The tables thus drawn are
known as mechanically drawn tables. Tabulation done through
machine is quicker and more accurate. For drawing the tables
mechanically, the following steps have to be taken:
• Coding or encoding of entries.
• Punching or punching of tabulation cards.
• Sorting or sorting the cards and
• Tabulation of marks.
14.4.2 Rules for Determining Class Intervals
The following facts must be taken into account in determining the class
intervals:
• The range is the difference between the largest and smallest
observation in the given data.
• The choice of the number of class intervals basically depends upon
the number of items to be classified and magnitude desired.
• The actual number of class intervals would also depend on the size
of class intervals.
• In dividing upon the size of class interval on fundamental
consideration should be borne in mind.
• The number of classes should be so determined that an orderly and
regular sequence of frequencies is secured.
• It is better, if the class intervals of all the classes are equal.
• Classes with zero frequency should neither be added with other
classes, nor should they be omitted.
• A general rule for determining the classes is to have 5 to 15
classes.
• The choice of actual number of classes will depend on the number
of observations and the size of class intervals required.
154
14.4.3 Difference between Hand Tabulation and Machine
Tabulation
The difference between Hand tabulation and Machine tabulation is as
follows:
S.No Hand Tabulation Machine Tabulation
1. It is simple It is sophisticated
2. Manually done Mechanically done
3. It can be done with work Accessories required

sheets
4. Semi-skilled manpower EDP trained manpower

required required
5. Less expensive Expensive, but speedy and

convenient
6. No prior preparation Coding and layout called for
7. Good for a survey of limited Good for ambitious survey

scope
8. Re-tabulation is cumbersome, Re-tabulation and other

who process needs repetition. arithmetical operations are
speed.
14.5 GROUPED AND UNGROUPED DATA

The data obtained from the source may be either ungrouped or grouped.
i. Ungrouped data – the data obtained in a original form are called raw
data or ungrouped data. For example, the marks obtained by 10
students in business management subject is
58,57,62,78,68,72,75,82,70,72.
Array – An arrangement of ungrouped data in ascending or
descending order of magnitude is called array.
ii. Grouped data – To put the data in a more condensed form we make
groups of suitable size and mention the frequency of each group,
such a table is called grouped frequency distribution table.
The class intervals each class is bounded by two figures, which are called
class limits. The figures on the left-hand side of a class are called lower
limits and those on its right-hand side is called upper limit. The grouped
data is also classified into two types. They are:
155
a) Exclusive form or continuous interval form – refers to a
frequency distribution in which the upper limit of each class in
included that lower limit is included is called exclusive form. For
example, the marks obtained by some students are givens, we may
consider classes: 0 – 10, 10 – 20, 20 – 30, 30 – 40, etc, here 10, 20,
30, 40, etc are excluded.
b) Inclusive form or discontinues interval form – the frequency
distribution in which each upper limit as well as lower limits is
included, is called an inclusive form. For example, we have classes
from 0 – 10, 11 – 20, 21 – 30, 31 – 40, etc. here in 0 – 10 both 0 and
10 are included.
14.6 ADVANTAGES OF TABULATION
The advantages of tabulation are:
• The tabulation is a useful device for simplifying the collected data.
• The tabulation helps to logical ordering of the data.
• The tabulation also helps to summarize data.
• The tabulation helps make comparative study with related
variables.
• The tabulation also helps to save space and time, etc.
14.7 LIMITATIONS OF TABULATION
The tabulation is suffering from the following weaknesses:
• The tabulation does not provide any description of data.
• The tabulation requires special knowledge for understanding data.
• The tabulation gives repulsiveness for layman and
• The tabulation is more complex in nature.
LET US SUM UP
Tabulation is the process of summarizing raw data and displaying it in
compact form for further analysis. Table means recording in permanent
form and analysis that is made through classification and of placing the
right position things that are same and to be compared. In other words, a
table is a systematic organization of data in columns and rows. Moreover,
we discussed the objectives, nature types, general principles, methods,
group and ungrouped data, advantages and limitation of tabulation. It will
give a very good insight to the readers.
CHECK YOUR PROGRESS
1. The arrangement of data in rows and columns is called
156
a) Frequency distribution
b) Cumulative frequency distribution
c) Tabulation
d) Classification
2. When the quantitative and qualitative data are arranged according to a
single feature, the tabulation is known as
a) One-way
b) Bivariate
c) Manifold-division
d) Dichotomy
3. In the table, the unchecked term is known as
a) Prime Implications
b) Old Implications
c) Even implicant
4. Tabulation form exercises
a) Gates
b) Demorgan’s postulate
c) Matching process cycle
d) Venn diagram
5. The table where the variables are subdivided with interrelated features
are known as
a) Order level table
b) Sub parts of table
c) One way table
d) Two-way table
GLOSSARY
Tabulation : is a systematic and logical representation of

numeric data in rows and columns to facilitate
comparison and statistical analysis.
Frequency : is an organized tabulation/graphical

distribution representation of the number of individuals in
each category on the scale of measurement
De Morgan's laws : When we have a collection of well-defined

distinct objects that form a group, this collection
is known as set. If we want to simplify set
operations such as taking
157
the complement, union, and intersection of
sets, then we use De Morgan's laws
SUGGESTED READINGS

House, Mumbai.
New Delhi,
McGraw Hill, India
India
WEB RESOURCES
1. Tabulation of Data - YouTube
2. Lecture 35 - Data Processing (Editing, Coding, Classification,
Tabulation) - Bing video
3. What is Cross-Tabulation & How to do it? | Contingency or Cross
Tabs - Bing video
4. Data Classification and Tabulation - Bing video
1.c 2.a 3.a 4.c 5.d
158
UNIT 15
ORGANISING DATA – GRAPHS AND
DIAGRAMS
STRUCTURE
Overview
Learning Objectives
15.1 Frequency Table / Distribution
15.1.1 General Rules for Graphic Presentation of Data
15.1.2 Graphic Presentation of Data
15.1.3 Importance of Diagrams
15.2 Diagrammatic Presentation of Data
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The source material that is collected from various sources about a
problem is called data. It has to be organized properly so that correct
results may be found and arrived at. It is done through measures. The
data arranged in the form of frequency tables, graphic presentation, and
diagrammatic presentation is briefly discussed in the lesson.
LEARNING OBJECTIVES
• point out preparation of frequency table
• draw charts and graphic presentation of data
• explain the importance of diagrams
15.1 FREQUENCY TABLE / DISTRIBUTION
A frequency distribution is a serve where a number of observations with
similar or closely related values are put in separate bunches groups, each
group being in order of magnitudes in a series. For example, given below
are the marks of 36 students in disorganized manner. In order to have a
correct idea about their ability or achievements, they have to be organized
properly. Then only it shall be possible to get some tangible results.
Marks of 36 students in Accountancy subject
159
56 57 56 63 64 88
65 58 59 61 63 77
85 88 88 71 76 78
70 77 75 65 69 57
58 63 88 64 71 73
80 85 63 88 56 57
Steps to organize the given data
i. To find out the range
ii. To arrange in convenient groups
iii. To calculate frequency
iv. After putting tally mark, they are added up put down at end group.
Frequency Table Construction
Class – Interval Tally bar Frequency
56 – 60 1111 1111 9
61 – 65 1111 1111 9
65 – 70 11 2
71 – 75 1111 4
75 – 80 1111 5
81 – 85 11 2
86 – 90 1111 5
Total 36
15.1.1 General Rules for Graphic Presentation of Data
Graphic representation is a useful and important method of the

presentation of data. Therefore, like other techniques graphic
presentation must be used with much care. It makes the understanding of
the subject matter clear every for the layman. The general rules for
graphic presentation involve:
• The chart should have a little placed directly above the chart.
• The title should be clear, concise and simple.
• It should describe the nature of data presented.
160
• The horizontal line measures independent variable the vertical line
the measured variable.
• Measurement processed from left to right on horizontal line and from
bottom to top on the vertical.
• Each curve or bar on the chart should be labeled.
• If there are more than one curve or bar, they should be clearly
differentiated.
• The zero point should always be represented, and scale intervals
should be equal.
• Graphic forms should be used sparingly.
• Graphic forms should follow, not precede the related textual
discussion.
15.1.2 Graphic Presentation of Data
In a graphic mode of presentation, the points or lines of various kinds are
used to present data. Each group paper has thick lines for each division
of an inch or centimeter and this line for smaller parts of the same. A graph
of whatever size divided into four quadrants but normally the first
quadrants is used unless these are minus to be shown on either of the
axis. The horizontal axis is called x axis and the vertical axis the y axis.
These interests at a center point are called the origin indicated by 0.
P x = +5.0
y = +7.0
Types of Graphs
The graphs are classified into two main heads. They are:
I. Natural Scales and II. Ratio Scales
Natural Scales – are also sub divided into two types
161
A) Time Series and B) Frequency
a) Time Series - based graphs are sub divided into horizontal line,
component or band, net balance or silhouette, range of variation
and I – curve.
B) Frequency-based graphs are subdivided into
a) Vertical line
Vertical Lines means a revision effective with the current Agreement. A
single vertical line denotes an editorial change. A double vertical line
denotes a negotiated revision effective with the current Agreement. It is
represented with the help of the following graph.
b) Histogram
A histogram is a graphical representation of data points organized into
user-specified ranges. Similar in appearance to a bar graph, the histogram
condenses a data series into an easily interpreted visual by taking many
data points and grouping them into logical ranges or bins. It is represented
with the help of the following graph.
162
c) Polygon
A polygon is a closed two-dimensional figure composed of straight-line
segments that meet at their endpoints. The line segments of polygons are
called sides, and each endpoint is called a vertex. It is represented with
the help of the following graph.
d) Ogive
An ogive or ogival arch is a pointed, "Gothic" arch, drawn with compasses
as outlined above, or with arcs of an ellipse as described. A very narrow,
steeply pointed ogive arch is sometimes called a "lancet arch". The most
common form is an equilateral arch, where the radius is the same as the
width. It is represented with the help of the following graph.
e) Lorenz Curve
The Lorenz curve is a graphical representation of the distribution of
income or wealth in a society. Basically, the farther the curve moves from
163
the baseline, represented by the straight diagonal line, the higher the level
of inequality. It is represented with the help of the following graph.
II. Ratio Scales – are sub divided into: Semi–logarithmic and

Logarithmic
15.1.3 Importance of Diagrams

Diagram refers to the various types’ of bars, circles, maps, pictorials,
cartograms, etc. which are strictly speaking no graphic. Diagrams help us
to see the patterns and the shape of any complex situation. The
importance of a diagram can be judged from the following points:
• It helps attract the data
• It also helps to easily memorize the facts
• It is possible to make a comparative study
• It helps minimize the process of learning
• It is more useful for the publicity of data
• Through the diagrams, statistical analysis becomes easier.
15.2 DIAGRAMMATIC PRESENTATION OF DATA
Once the investigator has collected the data, the problem before him is to
present it. The presentation of the data is done through various methods.
Various methods of diagrammatic presentation of data are briefly given.
i.One Dimensional Diagrams (or) Single Dimensional Diagrams – in
such diagrams only one dimension, that is length is taken up of
comparative study. The thickness or the breadth is not taken into account
for study. The single dimension diagram can further be divided into the
following types:
164
a. Line diagrams
A line graph is a graphical display of information that changes
continuously over time. It is diagrammatically presented as follows:
b. Simple bar diagrams

A simple bar chart is used to represent data involving only one variable
classified on a spatial, quantitative or temporal basis. It is
diagrammatically presented as follows:
c. Multi-bar diagrams
A chart depicting two or more characteristics in the form of bars of length
proportional in magnitude of the characteristics. It is diagrammatically
presented as follows:
165
d. Sub-divided bar diagrams
Sub-divided bar diagrams are those diagrams which simultaneously
present total values as well as part values of a set of data. It is
e. Deviation bar diagrams

The deviation bar diagrams are used to compare the net deviation of
related variables with respect to time and location. It is diagrammatically
presented as follows:
166
f.
g.
h.
i.
j.
k.
l.
m.
f. Sliding bar diagrams

Sliding bar graphs show two categories as bars graphed in opposite
directions. They can be used to compare amounts or frequencies. It is
g pyramid diagrams
A pyramid graph is a chart in the shape of a triangle or pyramid. These
charts are best used when your data is organized in some kind of
hierarchical way. It is diagrammatically presented as follows:
167
ii.Two dimensional diagrams – these are known as area diagrams. They
are given this name because the intention is to show comparison of the
areas rather than the simple heights. In such diagrams both length and
breadth are taken into account. These type diagrams are further classified
into the following heads:
a. Rectangle
A Rectangle is a four sided polygon, having all the internal angles equal
to 90 degrees. The two sides at each corner or vertex, meet at right
angles. The opposite sides of the rectangle are equal in length which
makes it different from a square. It is also presented in the diagram.
b. Square
Square is a flat shape with four sides of equal length and four angles of
90°. It is also presented in the diagram.
168
c. Circle
The circular diagram shows the data values as percentages of the total.
Separate divisions make up categories. The size of each segment will be
determined by its respective value. Circular diagrams usually show
percentages. It is also presented in the diagram.
d. Pictogram
A pictogram is a chart or graph which uses pictures to represent data in a
simple way. Each picture in the pictogram represents a physical object.
They are set out the same way as a bar chart but use pictures instead of
bars. It is also presented in the diagram.
e. Cartogram
A cartogram is a thematic map of a set of features in which their
geographic size is altered to be directly proportional to a selected ratio-
level variable, such as travel time, population, or GNP. It is also presented
in the diagram.
169
f. Maps
Map refers to “concept maps,” which are visual tools that organize and
display knowledge in a visual way, such as using flow charts, graphs, and
Venn diagrams. The includes base maps, spot map, cross hatched maps
and graphic maps.
LET UP SUM UP
In this lesson, the source material that is collected from various sources
about a problem is called data. It may be organized properly so that
current results may be found and arrived at. This lesson mainly covered
three aspects such as frequency table construction, graphic and
diagrammatic presentation of data. Really, this lesson will give a bright
understanding to the readers.
CHECK YOUR PROGRESS
1. Which of the following is an example of compressed data?
a) Histogram
b) Ungrouped data
c) Frequency distribution
d) Tabulation
2. Frequency curve is
a) Asymptotic to y-axis
b) Non-asymptotic to y-axis
c) Asymptotic to x-axis
170
3. A circle in which sectors represents various quantities is called
a) Histogram
b) Frequency Polygon
c) Pie chart
d) Component bar chart
4. A histogram is
a) A frequency graphs
b) A time-series plot
c) A graph-plotting mean against standard deviation
d) A correlative frequency charts
5. Component bar charts are used when data is divided into:
a) Parts
b) Groups
c) Circles
GLOSSARY
Graph : is a common method to visually illustrate

relationships in the data.
Diagram : is a graphic representation used to explain the

relationships and connections between the
parts it illustrates
Pictogram : is a type of charts and graphs that use icons

and images to represent data
Cartogram : is a map showing geographically

diagrammatic statistics of various kinds
usually by the use of shades, curves, or dots
SUGGESTED READINGS
171
McGraw Hill, India
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. RESEARCH CHAPTERS 4 & 5 | Data & Analysis, Conclusion &

Recommendation - Bing video
2. METHODS OF PRESENTATION OF DATA - Bing video
3. Fundamentals of Qualitative Research Methods: Data Analysis
(Module 5) - Bing video
1.c) 2.c) 3.c) 4.a) 5.b)
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BLOCK 4
PARAMETRIC & NON - PARAMETRIC

TESTS
UNIT 16 : STATISTICAL TEST IN RESEARCH
UNIT 17 : PARAMETRIC TEST
UNIT 18 : NON-PARAMETRIC TEST

UNIT 19 : COMPUTER SOFTWARE
APPLICATION IN RESEARCH
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UNIT 16
STATISTICAL TEST IN RESEARCH

STRUCTURE
Overview
Learning Objectives
16.1 Uni-variate Analysis
16.2 Bi-variate Analysis
16.3 Multi-variate Analysis
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
In management research, we try to do determine the acceptability of

hypothesis to reach an objective decision or scientific conclusions. Here,
we will recapitulate the same once again to describe the usefulness of
statistical tests in research. In this lesson, we will discuss univariate, bi-
variate and multi-variate analysis. Moreover, we will discuss the
parametric and non-parametric test and their applications in separate
units.
LEARNING OBJECTIVES
• list out the use of statistical applications in research.
• explain the application of univariate, bi-variate and multi-variate
analysis.
16.1 UNI-VARIATE ANALYSIS
Uni-variate analysis is the simplest of statistical analysis. Like other forms
of statistics, it can be classified into descriptive and inferential. The key
aspect is that only one variable is involved. The descriptive statistics
describe a sample or population. They can be part of exploratory data
analysis. The inferential methods allow concluding from a sample to a
population.
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• Arithmetic Average / Mean – means of a series of the value
obtained by dividing the sum of the value of various items in a
series divided by the number of items constituting the series.
• Median – is the value of the middle item of a series arranged in an
ascending or descending order of magnitude.
• Mode – the mode refers to the value in a distribution which occurs
most frequently.
• Geometric mean – is a series containing N observation is the Nth
root of the product values. If there are two times or values, the
square root of the product of the values is the geometric mean, if
there are three values, the cube root is the geometric mean and
so on.
• Harmonic Mean – is a series the reciprocal of the arithmetic
average of the value of its various items.
• Range – is the difference between the greatest and smallest
observation of the distribution.
• Quartile deviation - is a measure of dispersion based on the
upper quartile and the lower quartile.
• Mean deviation – is the arithmetic mean of the deviations of the
individual values from the average of the given data.
• Standard deviation – is defined as the positive square root of the
arithmetic means of the squares of deviations of given
observations from their arithmetic mean.
• Loren Curve – is a graphical method of showing deviation from
the average of data. This method is most commonly used to slow
in equality of income or wealth in a country and sometimes to make
comparisons between countries or between different time periods.
• Skewness – is a measure that refers to the extent of symmetry or
asymmetry in a distribution. In other words, it describes the shape
of a distribution.
• Movement – is a familiar mechanical term for the measure of a
force with reference to its tendency to produce rotation.
• Kurtosis – is a distribution measured relative to the peaked Ness
of a normal curve.
• One way Chi-Square
• One sample T-Test and
• Wilconxon Rank Test.
The above said simple statistical application is collectively named uni-
variate analysis.
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16.2 BI-VARIATE ANALYSIS
Bi-variate analysis is one for the simplest forms of quantitative Statistical
analysis. it involves the analysis of two variables (often denoted as X, Y)
for the purpose of determining the empirical relationship between them.
The bi-variate analysis can be helpful in testing simple hypothesis of
association. It consists of the following statistical test. They are:
i. Correlation analysis – is a statistical technique used for
measuring the relationship or interdependence of two or more
variables. Correlation co-efficient can range from -1 to +1. The
value of -1 represents a perfect negative correlation which a value
of +1 represents a perfect positive correlation. A value of 0.00
represents a Lack of correlation.
ii. Regression Analysis – is used to model relationships between
random variables, determine the magnitude of relationship between
variable, and can be used to make predictions based on the
models.
iii. Multiple regression – is used as a data analytic strategy to explain
or predict a criterion despondent variable with a set of predictor
independent variables.
iv. The Scatter Diagram – is a tool for determining the potential
correlation between two different sets of variables. This diagram
simply plots pairs of corresponding data from two variables. The
scatter diagram does not determine the exact relationship between
two variables, but it does indicate whether they are correlated or
not.
v. Pearsons Product Movement Pearson’s (r) - measures
relationships between interval variables. The strength of
relationship varies between 0 means no relationship and 1 means
perfect relationship so, the closer Pearson’s r is to 1, the stronger
relationship between two variables. Pearson’s will either be positive
or negative, which indicates the direction of the relationship.
vi. Spearman’s r Ho (p) – Bi-variate is used when at least one of the
two variables is ordinal and the other is ordinal or interval. This
calculation produces the same kind of outcome as Pearson’s r.
vii. Phi and Cramer’s V – Bi-variate – Phi is used for exploring a
relationship between two dichotomous variables; cramer’s V does
the same for two nominal variables. Phi outcomes are like
Pearson’s r and spearman’s rho and can vary between 0 and + or
-1. Cramer’s V can only show strength of relationship, not direction,
the co-efficient is always positive.
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viii. Eta-bi-variate – is used to explore relationship between an interval
variable and a nominal variable and like Cramer’s V can only show
strength of relationship not direction. It does not assume a linear
relationship.
The above said statistical tools are collectively named as bi-variate
analysis.
16.3 MULTI-VARIATE ANALYSIS
Multi-variate analysis is the analysis of the simultaneous relationships
among three or more variables. In uni-variate analysis focuses on the level
and distribution of variables. In a bi-variate analysis focus the shifts to the
degree of relationships between the variables. In multi-variate analysis,
the focus shifts from paired relationships to more complex simultaneous
relationships among the variables. The multi-variate analysis consists of
various statistical tools they are:
i. ANOVA – Analysis of variance is also called the F test. It is closely
associated with t-tests. The t test measures the difference between
the means of two groups whereas an ANOVA tests the difference
between the means of two or more groups. The ANOVA can be
classified into a one-way ANOVA and a factorial ANOVA.
ii. ANCOVA – Analysis of co-variance analyse both qualitative and
quantitative independent variables. The mixed procedure allows
the user to model both class and continuous variable (ie both
qualitative and quantitative). In ANOVA-type models, hypothesis
about class or interactions among means. In regression type
models, in which all factors are continuous variables, hypothesis
tests are test about regression co-efficient. As one might expect,
the assumptions of ANCOVA combine both the assumption of
regression and ANOVA.
iii. MANOVA – Multivariate Analysis of variance is simply an ANOVA
with several dependent variables. The MANOVA could be used to
test this hypothesis. Through uni-variate analysis F value, multi-
variate F value, wilks Lambda based on a comparison of the error
variance or co-variance matrix and the effect variance or co-
variance matrix. The co-variance here is included because the two
measures are probably correlated, and we must take this
correlation into account when performing the significant test.
iv. MANCOVA – Multivariate Analysis of Co-variance Analysis is an
extension of ANCOVA. It is simply the application of MANOVA
where the artificial direct variables are initially adjusted for
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differences in one or more co-variates. This can reduce error, when
error associated with the co-variate is removed.
v. Multiple Regression Analysis – is used to account for predict the
variance in an interval dependent, based on linear combination of
interval, dichotomous or dummy independent variables. It can be
established that a set of independent variables explains a
proportion of the variance in a dependent variable at a significant
level through a significant list of R2 and can establish the relative
predictive importance of the independent variables. R represents
the correlation between the observed values and predicted values
based on the regression equation obtained.
• Standard multiple regression
• Hierarchical or Sequential multiple regression and
• Statistical or Stepwise multiple regression.
vi. Discriminant Analysis – is used to classify the sample into two or
more categories. Discriminant function analysis is used to
determine which variables discriminate between two or more
naturally occurring groups. The objectives of two group discriminant
analysis is to find a linear composite of the predictor variable to help
the analyst to separate the groups, establishing, procedures for
assigning new individuals, testing for significant differences
between the means predictor variables and determining the
variables which accounts for the most inter-group differences.
vii. Conjoint Analysis – deals with measurement of the combined
effect of two or more attributes that are important from the view of
consumer. The use of the conjoint analysis will be more appropriate
in a situation where a company would like to know the most
describable attribute for a new product or service.
The main steps involved in the application of conjoint analysis are:
• Determination of salient attributes.
• Assigning levels to the selected attributes
• Fractional factorial design of experiments
• Physical design of the stimuli
• Data collection
• Determination of path-worth utilities – such as regression models,
mathematical programming models, and econometric models may
be used for the part worth utility models.
viii. Factor Analysis – is used to uncover the latent structure or
dimensions of a set of variables, it reduces attribute space from a
larger number of variables to smaller number of factors, of variables
to smaller number of factors. Factor analysis is developed by Charles
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Spearman. He made an attempt to show that a wide variety of mental
tests could be explained by a single intelligence factor. It is part of the
general linear model family of procedure and makes many of the
same assumptions as multiple regressions, but it uses multiple
outcomes. It involves several dimensions:
• Factor and component
• Exploratory and confirmatory factor analysis
• Extraction
• Factory loading
• Communicates
• Eigen value and scree plot
• Scale reliability
• Sample size considerations
ix. Cluster Analysis – is a technique used to segment the market.
It is used to classify a person or object into a small number or
mutually exclusive and exhaustive groups. Cluster analysis like
factor analysis and multi-dimensional scaling is an
interdependence technique; it makes no distinction between
dependent and independent variables. The entire set of
interdependent relationships is examined. It is similar to multi-
dimensional scaling in that both examine inter object similarity by
examining the complete set of interdependent relationships it is
useful to classify groups or objects and is more objective than
subjective. For example, in marketing research cluster analysis
used for “product positioning and new product development” etc.
x. Multi-Dimensional Scaling – it is also known as perceptual map
or positioning map. It is used for measuring human perception
and preferences. It is spatial representation of relationships. It
helps in the identification of attributes and the positioning of
different products or brands on the basis of these attributes. The
metric multi-dimensional scaling and non-metric dimensional
scaling. The two approaches can be used for analyzing multi-
dimensional data. It can be done by measuring the attributes or
distance between objects.
These are various statistical tests associated with multivariate analysis.
LET US SUM UP
In this unit, management research is trying to determine the acceptability
of hypothesis to reach decision or scientific conclusion. Here we have
discussed various statistical tools such as uni-variate analysis, bi-variate
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analysis and multivariate analysis. Hence this unit will give an in-depth
understanding to readers.
CHECK YOUR PROGRESS
1. Which of the following cannot be covered under univariate analysis of
data?
a) Association between two variables
b) Computation of mean, median and mode
c) Preparation of frequency table
d) Computation of percentage frequency for a variable
2. Which of the following tests must be two-sided?
a) Kruskal-Wallis test
b) Wilcoxon Signed rank test
c) Runs test
d) Sign test
3. If a Chi-square goodness of fit test has 6 categories and an N=30, then
the correct number of degrees of freedom is
a) 5
b) 6
c) 28
d) 29
4. The Spearman rank-correlation test requires that the
a) Data must be measured on the same scale
b) Data at least ordinal scale
c) Data must be from two independent samples
d) Data must be distributed at least approximately as a t-distribution
5. Factor analysis is a technique for
a) Univariate data
b) Bivariate data
c) Multivariate data
d) Both (a) and (b)
GLOSSARY
Univariate : is basically the simplest form to analyze data. Uni

analysis means one and this means that the data has only
one kind of variable. The major reason for
univariate analysis is to use the data to describe.
The analysis will take data, summarise it, and
then find some pattern in the data.
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Bi-variate : is one of the statistical analyses where two
Analysis variables are observed. One variable here is
dependent while the other is independent.
Multi-variate : is based in observation and analysis of more

Analysis than one statistical outcome variable at a time.
SUGGESTED READINGS

House, Mumbai.
Hill, New Delhi,
McGraw Hill, India
India
WEB RESOURCES
1. Research Methods - Choosing Inferential Statistics - Bing video
2. Introduction to Research and Statistics - Bing video
3. Choosing a Statistical Test - Bing video
1.a) 2.d) 3.a) 4.b) 5.c)
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UNIT 17
PARAMETRIC TEST
STRUCTURE
Overview
Learning Objectives
17.1 Pearson Product Correlation Coefficient
17.2 Student T-test
17.3 The Z-Test
17.4 ANOVA Test
17.5 Advantages of Parametric test
17.6 Limitations of Parametric test
Let sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
According to Robson (1994), parametric statistical test is a test whose
model specifies certain conditions about the parameters of the population
from which the research sample was drawn. He stated the conditions to
include the observations must be independent, the observations must be
drawn from normally distributed populations, these populations must have
the same variances and variables involved must have been measured in
at least an interval scale. Commonly used parametric tests are described
below.
LEARNING OBJECTIVES
• explain the use of parametric tests in research.

• discuss the types of parametric test
• examine the application of parametric test.
17.1 PEARSON PRODUCT CORRELATION COEFFICIENT

The correlation coefficient (r) is a value that tells us how well 2 continuous
variables from the same subject correlate to each other. An r value of 1.0
means the data are completely positively correlated and 1 variable can be
used to compute the other. An r of zero means that the 2 variables are
completely random. An r of - 1.0 is completely negatively correlated. The
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important thing to remember is that this is only an association and does
not imply a cause- and-effect relationship.
The coefficient of correlation is said to be a measure of covariance
between two series. The covariance of two series X and Y is written as:
∑ 𝑥𝑦
Covariance = 𝑁
Where x and y stand for deviations of X and Y series from their respective
means.
In order to find out the value of correlation coefficient, first we calculate
covariance and then in order to convert it to a relative measure we divide
the covariance by the standard deviation of the two series. The ratio so
obtained is called Kari Pearson’s coefficient
∑ 𝑥𝑦 ∑ 𝑥2 ∑ 𝑦2
between = =r= 𝑁
𝜎x=√ 𝑁
, 𝜎y = √ 𝑁
∑ 𝑥𝑦 ∑ 𝑥𝑦
r= =
√∑ 𝑥
2 ∑ 𝑦2 √∑ 𝑥 2 𝑥 ∑ 𝑦 2
𝑁 𝑥
𝑁 𝑁
Example 1: Calculate Karl Pearson’s coefficient of correlation from the

following data and interpret its value:
Roll No. of Students: 1 2 3 4 5
Marks in Accountancy: 48 35 17 23 47
Marks in Statistics : 45 20 40 25 45
Solution: Let marks in Accountancy be denoted by X and marks in
Statistics by Y.
Roll X (X – 34) X2 Y (Y – 35) y2 xy

No
Y
1 48 +14 196 45 +10 100 +140
2 35 +1 1 20 -15 225 -15
3 17 -17 289 40 +5 25 -85
4 23 -11 121 25 -10 100 +110
5 47 +13 169 45 +10 100 +130
∑x=170 ∑x=0 ∑x2=776 ∑Y=175 ∑y=0 ∑y2=550 ∑xy=280
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∑ 𝑥𝑦
r=
√∑ 𝑥 2 𝑥 ∑ 𝑦 2
x = (X – X), y = (Y – Y)
∑𝑋 170 ∑𝑌 175
𝑋= 𝑁
= 5
= 34 ; 𝑌 = 𝑁
= 5
= 35
∑xy=280, ∑x2=776, ∑y2=550

280 280
r= = 653−299 = 0.429
√776 𝑥 550
95% confidence limits of the population mean

𝑆
𝑋=± 𝑡0.05
√𝑛
3
= 53 ± x 2.13
√16
= 53 ± 1.6 = 51.4 to 54.6

99% confidence limits of the population mean
𝑆
𝑋=± 𝑡0.01
√𝑛
3
= 53 ± x 2.95
√16
3
= 53 ± 4 x 2.95
= 53 ± 2.212 = 50.788 to 55.212

17.2 STUDENT T-TEST
The student t-test is probably the most widely used parametric test. It was
developed by a statistician working at the Guinness brewery and is called
the student t-test because of proprietary rights. A single sample t-test is
used to determine whether the mean of a sample is different from a known
average. A 2-sample t-test is used to establish whether a difference
occurs between the means of 2 similar data sets. The t-test uses the
mean, standard deviation, and number of samples to calculate the test
statistic. In a data set with a large number of samples, the critical value
for the student t-test is 1.96 for an alpha of 0.05, obtained from a t- test
table. The calculation to determine the t-value is relatively simple, but it
can be found easily on-line or in any elementary statistics book.
Example 1: The manufacturer of a certain make of electric bulbs claims

that his bulbs have a mean life of 25 months with a standard deviation of
5 months. A random sample of 6 such bulbs gave the following values.
Life of Months 24,26,30,20,20,18

Can you regard the producer’s claim to be valid at 1% level of
significance? (Given that the table values of the appropriate test statistics
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at the said level are 4.032, 3.707 and 3.499 for 5,6 and 7 degrees of
freedom respectively.)
Solution: Let us take the hypothesis that there is no significant difference
in the mean life of bulbs in the sample and that of the population. Applying
for t-test:
(𝑋− 𝜇)
t=
𝑆
√𝑛
CALCULATION OF 𝑋 and S
X (X – 𝑋) X2
24 +1 1
26 +3 9
30 +7 49
20 -3 9
20 -3 9
18 -5 25
∑X = 138 ∑x2 = 102
∑𝑋 138
𝑋 = 𝑛
= 6
= 23
∑ 𝑥2 102
S = √𝑛−1 = √ 5
= √20.4 = 4.517
|23−25| 2 𝑥 2.449
= 4.517
√6 = 4.517
= 1.084
v = n – 1 = 6 – 1 = 5, For v = 5. t0.01 = 4.032

The calculated value of t is less than the table value. The hypothesis is
accepted. Hence, its producer’s claim is not valid at 1% level of
significance.
Example 2: A random sample of size 16 has 53 as mean. The sum of the
squares of the deviations taken from mean is 135. Can this sample be
regarded as taken from the population having 56 as mean? Obtain 95%
and 99% confidence limits of the mean of the population. (for v = 15, t0.05
= 2.95)
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Solution: Let us take the hypothesis that there is no significant
difference between the sample mean and hypothetical population mean.
Applying t test:
𝑋− 𝜇
t= 𝑆
√𝑛
𝑋 = 53, 𝜇 = 56, n = 16, ∑(X – 𝑋)2 = 135

∑( 𝑋−𝑋) 135
S = √ 𝑛−1 = √ 15 = 3
|53−56| 3𝑥4
t=
3
√16 = 3
=4
v = 16 – 1 = 15, For v = 16, t0.05 = 2.13
The calculated value of t is more than the table value. The hypothesis is
rejected. Hence the sample has not come from a population having 56 as
mean.
17.3 THE Z-TEST
The Z-test is very similar to the student t-test. However, with the z-test,
the variance of the standard population, rather than the standard deviation
of the study groups, is used to obtain the z-test statistic. Using the z-chart,
like the t-table, we see what percentage of the standard population is
outside the mean of the sample population. If, like the t-test, greater than
95% of the standard population is on one side of the mean, the p-value is
less than 0.05 and statistical significance is achieved. As some
assumption of sample size exists in the calculation of the z-test, it should
not be used if sample size is less than 30. If both the n and the standard
deviation of both groups are known, a two-sample t-test is best.
One-Sample Z Test
A one-sample z test is used to check if there is a difference between the

sample mean and the population mean when the population standard
deviation is known. The formula for the z test statistic is given as follows:
is the sample mean, μ is the population mean, σ is the

population standard deviation and n is the sample size.
The algorithm to set a one sample z test based on the z test statistic is
given as follows:
Left Tailed Test:
Null Hypothesis: H0 : μ=μ0

Alternate Hypothesis: H1 : μ < μ0
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Decision Criteria: If the z statistic < z critical value then rejects the null
hypothesis.
Right Tailed Test:
Alternate Hypothesis: H1 : μ > μ0
Decision Criteria: If the z statistic > z critical value then rejects the null
hypothesis.
Two Tailed Test:
Alternate Hypothesis: H1 : μ ≠ μ0
Decision Criteria: If the z statistic > z critical value then rejects the null
hypothesis.
Two Sample Z Test
A two-sample z test is used to check if there is a difference between the
means of two samples. The z test statistic formula is given as follows:
are the sample mean, population mean and

population variance respectively for the first
sample. are the sample mean, population mean and population
variance respectively for the second sample.
The two-sample z test can be set up in the same way as the one-sample
test. However, this test will be used to compare the means of the two
samples. For example, the null hypothesis is given as H0 : μ1=μ1=μ2.
187
Z Test for Proportions
A z test for proportions is used to check the difference in proportions. A z
test can either be used for one proportion or two proportions. The formulas
are given as follows.
One Proportion Z Test
A one proportion z test is used when there are two groups and compares
the value of an observed proportion to a theoretical one. The z test statistic
for a one proportion z test is given as follows:
. Here, p is the observed value of the proportion, p0p0 is
the theoretical proportion value and n is the sample size.
The null hypothesis is that the two proportions are the same while the
alternative hypothesis is that they are not the same.
Two Proportion Z Test
A two-proportion z test is conducted on two proportions to check if they
are the same or not. The test statistic formula is given as follows:
p1 is the proportion of sample 1 with sample size n1n1 and x1 number of

trials.
p2 is the proportion of sample 2 with sample size n2 and x2 number of
trials.
Important Notes on Z Test

• Z test is a statistical test that is conducted on normally distributed
data to check if there is a difference in means of two data sets.
• The sample size should be greater than 30 and the population
variance must be known to perform a z test.
• The one-sample z test checks if there is a difference in the sample
and population mean,
• The two sample z test checks if the means of two different groups
are equal.
Examples on Z Test
• Example 1: A teacher claims that the mean score of students in his
class is greater than 82 with a standard deviation of 20. If a sample of 81
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students was selected with a mean score of 90 then check if there is
enough evidence to support this claim at a 0.05 significance level.
Solution: As the sample size is 81 and population standard deviation is
known, this is an example of a right-tailed one-sample z test.
As 3.6 > 1.645 thus, the null hypothesis is rejected, and it is concluded
that there is enough evidence to support the teacher's claim.
Answer: Reject the null hypothesis

Example 2: An online medicine shop claims that the mean delivery time
for medicines is less than 120 minutes with a standard deviation of 30
minutes. Is there enough evidence to support this claim at a 0.05
significance level if 49 orders were examined with a mean of 100 minutes?
Solution: As the sample size is 49 and population standard deviation is
known, this is an example of a left-tailed one-sample z test.
From the z table the critical value at α = -1.645. A negative sign is used
as this is a left tailed test.
As -4.66 < -1.645 thus, the null hypothesis is rejected, and it is concluded
that there is enough evidence to support the medicine shop's claim.
Example 3: A company wants to improve the quality of products by
reducing defects and monitoring the efficiency of assembly lines. In
assembly line A, there were 18 defects reported out of 200 samples while
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in line B, 25 defects out of 600 samples were noted. Is there a difference
in the procedures at a 0.05 alpha level?
Solution: This is an example of a two-tailed two proportion z test.
H0: The two proportions are the same.
H1: The two proportions are not the same.
As this is a two-tailed test the alpha level needs to be divided by 2 to get
0.025.
Using this, the critical value from the z table is 1.96.
n1 = 200, n2n2 = 600
p1 = 18 / 200 = 0.09
p2 = 25 / 600 = 0.0416
p = (18 + 25) / (200 + 600) = 0.0537
As 2.62 > 1.96 thus, the null hypothesis is rejected, and it is concluded
that there is a significant difference between the two lines.
17.4 ANOVA TEST
Analysis of variance (ANOVA) is a test that incorporates means and
variances to determine the test statistic. The test statistic is then used to
determine whether groups of data are the same or different. When
hypothesis testing is being performed with ANOVA, the null hypothesis is
stated such that all groups are the same. The test statistic for ANOVA is
called the F-ratio. As with the t- and z-statistics, the F-statistic is compared
with a table to determine whether it is greater than the critical value. In
interpreting the F-statistic, the degrees of freedom for both the numerator
and the denominator are required. The degrees of freedom in the
numerator are the number of groups minus 1, and the degrees of freedom
in the denominator are the number of data points minus the number of
groups.
One Way Anova

ANOVA can be performed by following the short-cut method which is is
usually used in practice since the same happens to be a very convenient
method, particularly when means of the samples and/or mean of the
sample means happen to be non-integer values. It compares the means
of two or more independent groups in order to determine whether there is
190
statistical evidence that the associated population means are significantly
different.
Example 1: Set up an analysis of variance table for the following per acre
production data for three varieties of wheat, each grown on 4 plots and
state if the variety differences are significant.
Per acre production data
Plot of land Variety of wheat
A B C
1 6 5 5
2 7 5 4
3 3 3 3
4 8 7 4
Solution: We wish to test

Ho : All wheat varieties are the same or effects of different varieties on
wheat productin are the same
H1 : All varieties are not the same
We can solve the problem by the direct method or by short-cut method,
but in each case, we shall get the same result. We try below both the
methods.
Solution through direct method: First we calculate the mean of each of
these samples:
6+7+3+8
= =6
4
5+5+3+7
𝑥̅ 2 = =5
4
5+4+3+4
𝑥̅ 3 = =4
4
𝑥̅ 1+𝑥̅ 2+𝑥̅ 3
Mean of the sample means or 𝑥̅ =
𝑘
6+5+4
= =5
3
Now we work out SS between and SS within samples:
SS between = n1(𝑥̅ 1-𝑥̅ )-2+n2(𝑥̅ 2-𝑥̅ )-2+ n3(𝑥̅ 3-𝑥̅ )-2
= 4(6-5)2 + 4(5-5)2 + 4(4-5)2
191
=4+0+4
=8
SS within = ∑ (×1i - 𝑥̅ 1)2 + ∑ (×2i - 𝑥̅ 2)2 + ∑ (×3i - 𝑥̅ 3)2 ; I = 1,2,3,4
= {(6 - 6)2 + (7 - 6)2 + (3 – 6)2 + (8 – 6)2}

+ {(5 - 5)2 + (5 - 5)2 + (3 – 5)2 + (7 – 5)2}
+ {(5 - 4)2 + (4 - 4)2 + (3 – 4)2 + (4 – 4)2}
= { 0 + 1 + 9 +4 } + { 0 + 0 + 4 +4} + {1 + 0 + 1 +0}
= 14 + 8 + 2
= 24
SS for total variance = ∑ (×ij - 𝑥̅ )-2 I = 1,2,3… and j = 1,2,3…
= (6 – 5)2 + (7 – 5)2 + (3 – 5)2 + (8 – 5)2
+ (5 – 5)2 + (5 – 5)2 + (3 – 5)2
+ (7 – 5)2 + (5 – 5)2 + (4 – 5)2

+ (3 – 5)2 + (4– 5)2
= 1+ 4 +4+ 9 +0+ 0 +4+ 4 +0+ 1 +4+ 1
= 32
Alternatively, it (SS for total variance) can also be worked out thus:
SS for total = SS between + SS within
= 8 + 24 = 32
We can now set up the ANOVA table for this problem:
Source of SS df MS F-ratio Critical value

variation Flat 5%(from
the F-table)
Between 8 (3 – 1) = 2 8/2 = 4.00 =4.00/2.67 = 1.5 F(2,9)=4.26

sample within
24 (12 – 3) = 9 24/9 = 2.67
sample
Total 32 (12-1) = 11
The above table shows that the calculated value of F is 1.5 which is less
than the table value of 4.26 at 5% level with d.f. being v1 = 2 and v2 = 9
and hence could have arisen due to chance. This analysis supports the
null hypothesis of no difference is means. We may, therefore, conclude
192
that the difference in wheat output to varieties is insignificant and is just a
matter of chance.
Solution through short-cut method: In this case we first take the total of
all the individual values of n items and call it as T.
T in the given case = 60
n = 12
Hence, the correction factor = (T)2 In = 60 x 60/12 = 300. Now total SS,
SS between and SS within can be worked out as under:
(𝑇 2 )
Total SS= ∑ x2ij - ; i = 1,2,3, …and j = 1,2,3….
𝑛
= (6)2 + (7)2 + (3)2 + (8)2 + (5)2 +(5)2 +(3)2

60 𝑥 60
+ (7)2 + (5)2 + (4)2 + (3)2 +(4)2 - ( )
12
= 332 – 300 = 32
(𝑇1 )2 (𝑇)2
SS between = ∑ 𝑛1
- 𝑛
24 𝑥 24 20 𝑥 20 16 𝑥 16 60 𝑥 60
= ( 4 ) +( 4
) +( 4
) -( 12
)
= 144 + 100 + 64 – 300
=8
2
2 (𝑇𝑗 )
SS within = ∑ 𝑥𝑖𝑗 − ∑ 𝑛𝑗
= 332 – 308
= 24
It may be noted that we get exactly the same result as we had obtained
in the case of direct method. From now onwards we can set up ANOVA
table and interpret F-ratio in the same manner as we have already done
under the direct method.
Two Way Anova
A two-way ANOVA test is a statistical test used to determine the effect of

two nominal predictor variables on a continuous outcome variable. A two-
way ANOVA tests the effect of two independent variables on a dependent
variable.
Two-way ANOVA technique is used when the data are classified on the
basis of two factors. For example, the agricultural output may be classified
on the basis of different varieties of seeds and also on the basis of
different varieties of fertilizers used. A business firm may have its sales
193
data classified on the basis of different salesmen and also on the basis of
different varieties of machines used and also on the basis of different
grades of labour. Such a two-way design any have repeated
measurements of each factor or may not have repeated values. The
ANOVA technique is little different in case of repeated measurements
where we also compute the interaction variation. We shall now explain the
two-way ANOVA technique in the context of both the said designs with
the help examples.
Example – 1 : Set up ANOVA table for the following information relating
to three drugs testing to judge the effectiveness in reducing blood
pressure for three different groups of people:
Amount of Blood Pressure Reduction in Millimeters of Mercury
Group of People Drug
X Y Z
A 14 10 11
15 9 11
B 12 7 10
11 8 11
C 10 11 8
11 11 7
Do the drugs act differently?

Are the different groups of people affected differently?
Is the interaction term significant?
Answer the above questions taking a significant level of 5%.
Solution: We first make all the required computations as shown below:
Computations for Two-way ANOVA(in design with repeated values)
187 𝑥 187
Step(i) T=187,n=18, thus, the correction factor = 18
= 1942.72
Step(ii) Total SS=[(14)2+(15)2+(12)2+(11)2+(10)2+(11)2+(10)2+(9)2+(7)2+(8)2

(187)2
+(11)2+(11)2+(11)2+(10)2+(11)2+(8)2+(7)2-[ 18
]
= (2019 – 1942.72)
= 76.28
73 𝑥 73 56 𝑥 56 58 𝑥 58 (187)2
Step(iii) SS between columns(i.e., between drugs) = [ + + ]-[ ]
6 6 6 18
194
= 888.16+522.66+560.67-1942.72
= 28.77
70 𝑥 70 59 𝑥 59 58 𝑥 58 (187)2
Step(iv) SS between rows(i.e., between people) = [ + + ]-[ ]
6 6 6 18
= 816.67+580.16+560.67-1942.72
= 14.78
Step(v) SS within samples = (14 – 14.5)2+(15 – 14.5)2+(10 – 9.5)2+
(9 – 9.5)2+(11 – 11)2+(11 – 11)2+(12 – 11.5)2+
(11 – 11.5)2+(7 – 7.5)2+(7 –7.5)2+(8 –7.5)2+
(10 – 10.5)2+(11 – 10.5)2+(10 – 10.5)2+
(11 – 10.5)2+(11 – 11)2+(11 – 11)2+(8 – 7.5)2+
(7 – 7.5)2
=3.50
Step(vi) SS for interaction variation=76.28-[28.77+14.78+3.50]
= 29.23
The ANOVA Table
Source of SS df MS F-ratio Critical of

variation 5%
28.77 14.385
Between 28.77 (3-1)=2 [ ] F(2,9)=4.26
2 0.389
columns (ie.,
between = 14.385 =36.9
drugs)
14.78 7.390
Between rows 14.78 (3-1)=2 [ ] F(2,9)=4.26
2 0.389
(ie., between
people) = 7.390 =19.0
29.23 7.308
Interaction 29.23 4 [ ] F(4,9)=3.63
4 0.389
Within
3.50
Samples 3.50 17-2-2 [ ]
9
(Error)
= 0.389
Total 76.28 (18-1)=17
195
Here,
d.f. for interaction = d.f. for columns x d.f. for rows
d.f for error = d.f. for total
- d.f. for column
- d.f. for rows
- d.f. for interactions
The above table shows that all the three F-ratios are significant at 5% level
which means that the drugs act differently, different groups of people are
affected differently, and the interaction term is significant.
17.5 ADVANTAGES OF PARAMETRIC TEST
Although the non-parametric tests require fewer assumptions and can be
used on a wider range of data types, parametric tests are preferred
because non-parametric tests tend to be less sensitive at detecting
differences between samples or an effect of the independent variable on
the dependent variable. In other words, the power efficiency of the
nonparametric test is lower than its parametric counterpart. This means
that to detect any given effect at a specified significance level, a larger
sample size is required for the non-parametric test than the parametric
test (Robson, 1994). Some people also argue that non-parametric
methods are most appropriate when the sample sizes are small. However,
when the data set is large, (e.g. n > 100), the central limit theorem can be
applied, so often it makes little sense to use non-parametric statistics.
There are other assumptions specific to individual tests. For example,
when comparing the means of two independent samples, the variances
of the two distributions should be approximately equal. This is also known
as the assumption of homogeneity of variance.
When the data under analysis meets those assumptions for parametric
tests, we should choose parametric tests because they are more powerful
than non-parametric tests.
17.6 LIMITATIONS OF PARAMETRIC TEST
If the data deviate strongly from the assumptions of a parametric
procedure, using the parametric procedure could lead to incorrect
conclusions.
One must be aware of the assumptions associated with a parametric
procedure and should learn methods to evaluate the validity of those
assumptions.
196
The parametric assumption of normality is particularly worrisome for small
sample sizes (n < 30). Nonparametric tests are often a good option for
these data.
LET US SUM UP
In this unit, business research is trying to determine the acceptability of
hypothesis to reach a decision or scientific conclusion. Here we have
discussed various statistical tools such as parametric tests such as
Pearson Product Correlation Coefficient, Student T-test, The Z-test and
the ANOVA test. Hence, this unit will give an in-depth understanding to
the students.
CHECK YOUR PROGRESS
1. Which test is part of the parametric test?
a) Sign Test
b) Run Test for Randomness
c) Kruskal-Willis Test
d) z-test
2. Which characteristics come under Karl Pearson’s Coefficient of
Correlation?
a) Does not tell anything about cause-and-effect relationship
b) Independent of change of origin and scale
c) Varies between -1 and +1
d) All of the above
3. What is the abbreviation of ANOVA?
a) Analysis of variance
b) Analysis of variation
c) Analysis of variant
d) None of these
4. Which is not type of test of significance for small sample?
a) t- test
b) z-test
c) F-test
d) Q-test
5. When two attributes are present or absent together in the data and
actual frequency is more than the expected frequency is called
a) Positive Association
b) Negative Association
c) Independent Association
197
GLOSSARY
Parametric : is a statistical test which makes certain
Test assumptions about the distribution of the
unknown parameter of interest and thus the
test statistic is valid under these assumptions.
Student’s t – : Is a method of testing hypotheses about the
Test mean of a small sample drawn from a normally
distributed population when the population
standard deviation is unknown.
ANOVA : is a statistical test used to compare variances
across the means of different groups.
SUGGESTED READINGS

House, Mumbai.
New Delhi,
McGraw Hill, India
India
WEB RESOURCES
1. Biostatistics and Research Methodology | Parametric Test Part-1|

AKTU Digital Education - Bing video
2. Research Methodology, Part 1: Testing of Hypotheses Using
Parametric Methods - Bing video
1.d) 2.d) 3.a) 4.d) 5.a)
198
UNIT 18
NON-PARAMETRIC TEST
STRUCTURE
Overview
Learning Objectives
18.1 Chi-square Test
18.2 Spearman Rank Co-efficient
18.3 Mann-Whitney U Test
18.4 Kruskal-Wallis Test
18.5 Multiple Correlation
18.6 Multiple Regression Analysis
18.7 Regression Analysis
18.8 Other Non-Parametric Test
18.9 Application of Non-Parametric Test
18.10 Parametric Test vs Non-Parametric Test
18.11 Advantages of Non-Parametric Test
18.12 Limitations of Non-Parametric Test
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Nonparametric statistics (also called “distribution free statistics”) are those
that can describe some attribute of a population, test hypotheses about
that attribute, its relationship with some other attribute, or differences on
that attribute across populations, across time or across related constructs,
that require no assumptions about the form of the population data
distribution(s) nor require interval level measurement (Hebel, 2002).
According to Robson (1994), non-parametric tests should be used when
testing nominal or ordinal variables and when the assumptions of
parametric test have not been met A non-parametric statistical test is also
a test whose model does NOT specify conditions about the parameters of
the population from which the sample was drawn. It does not require
measurements as strong as that required for the parametric tests. Most
199
non-parametric tests apply to data in an ordinal scale, and some apply to
data in nominal scale. Commonly used non-parametric tests are
described below.
LEARNING OBJECTIVES
• describe the use of non-parametric tests in research.
• discuss the types of non-parametric test
• examine the application of non-parametric test.
18.1 CHI-SQUARED
The chi-squared test is usually used to compare multiple groups where

the input variable and the output variable are binary. The chi-square test
helps to decide whether a frequency distribution could be the result of a
definite cause or just chance. It does this by comparing the actual
distribution with the distribution which could be expected if chance was
the only factor operating. If the difference between the observed results
and the expected results is small, then perhaps chance is the only factor.
On the other hand, if the difference between observed and expected
results is large, then the difference is said to be significant, and we expect
that something is causing it.
Example 1: In an anti-malarial campaign in a certain area, quinine was
administered to 1,624 persons out of a total population of 6,496. The
number of fever cases is shown below:
Treatment Fever No Fever Total
Quinine 40 1,584 1,624
No quinine 440 4,432 4,872
Total 480 6,016 6,496
Discuss the usefulness of quinine in checking malaria.
Solution: Let us take the hypothesis that quinine is not effective in

checking malaria.
Applying x2 test:
(𝐴)𝑥 (𝐵) 480𝑥 1624
Expectation of (AB)= = = 120
𝑁 6596
or E1, i.e., expected frequency corresponding to first row and first column
is 120. The table of expected frequencies shall be:
200
120 1,504 1,624
360 4,512 4,872
480 6,016 6,496
O E (O – E)2 (O – E)2 / E
40 120 6,400 53,333
440 360 6,400 17,778
1,584 1,504 6,400 4,189
4,432 4,512 6,400 1,419
∑[(O – E)2 / E] = 76.719
X2 = [∑(O – E)2 / E] = 76.719

V = (r-1) (c-1) = (2-1) (2-1) = 1
For v = 1, x20.05 = 3.84
The calculated value of x2 is greater than the table value. The hypothesis
is rejected. Hence, quinine is useful in checking malaria.
Example 2: Based on information on 1,000 randomly selected fields
about the tenancy status of the cultivation of these fields and use of
fertilizers, collected in an agro-economic survey, the following
classification was noted:
Owned Rented Total
Using fertilizers 416 184 600
Not using 64 336 400

fertilizers
Total 480 520 1,000
Would you conclude that owner cultivators are more inclined towards the
use of fertilizers at 5% level?
Carry out the chi-square test as per testing procedure.
201
Solution: Let us take the hypothesis that ownership of fields and the
use of fertilizers are independent attributes.
(𝐴)𝑥(𝐵)
Expectation of (AB) =
𝑁
480 𝑥 600
= 1000
= 288
The table of expected frequencies shall be:
288 312 600
192 208 400
480 520 1000
Applying x2 test:
O E (O – E)2 (O – E)2 / E
416 288 16,384 56.889
64 192 16,384 85.333
184 312 16,384 52.513
336 208 16,384 78.769
∑[(O – E)2 / E] = 273.504
X2 = [∑(O – E)2 / E] = 273.504

V = (r-1) (c-1) = (2-1) (2-1) = 1
For v = 1, x20.05 = 3.84

The calculated value of x2 is much more than the table value. The
hypothesis is rejected. Hence it can be concluded that owners cultivators
are more inclined towards the use of fertilizers.
(𝐴)𝑥(𝐵) 60 𝑋 50
* E11 = = = 30
𝑁 100
18.2 SPEARMAN RANK COEFFICIENT

Like the Pearson product correlation coefficient, the Spearman rank
coefficient is calculated to determine how well 2 variables for individual
data points can predict each other. The difference is that the data need
not be linear. To start, it is easiest to graph all the data points and find the
x and y values. Then rank each x and y value in order of occurrence.
Similar to the Pearson correlation coefficient, the test statistic is from -1 to
202
1, with -1 being a perfect negative correlation and 1 a perfect positive
correlation.
Example 1: The ranking of 10 students in two subjects A and B are
follows:
A B A B
6 3 4 6
5 8 9 10
3 4 7 7
10 9 8 5
2 1 1 2
Calculate rank correlation coefficient.
Solution:
Calculation of rank correlation coefficient
R1 R2 (R1 – R2)
D2
6 3 9
5 8 9
3 4 1
10 9 1
2 1 1
4 6 4
9 10 1
7 7 0
8 5 9
1 2 1
∑D2=36
6∑𝐷 2 6 𝑋 36
R=1- = 1-
𝑁 3 −𝑁 103 −10
216
=1- = 1 – 0.218 = 0.782
990
Example 2: Two ladies were asked to rank 7 different types of lipsticks.
The given by them are as follows:
203
Lipsticks: A B C D E F G
Neelu: 2 1 4 3 5 7 6
Neena: 1 3 2 4 5 6 7
Solution:
Calculate Spearman’s rank correlation coefficient.
X Y (R1 – R2) D2
R1 R2 D
2 1 +1 1
1 3 -2 4
4 2 +2 4
3 4 -1 1
5 5 0 0
7 6 +1 1
6 7 -1 1
∑D2=12
6∑𝐷 2 6 𝑋 12 72
R=1- = 1- =1- = 1 – 0.214 = 0.786
𝑁 3 −𝑁 73 −7 336
Example 3: Ten competitors in a beauty contest are ranked by three

judges in the following order:
1st Judge 1 6 5 10 3 2 4 9 7 8
2nd Judge 3 5 8 4 7 10 2 1 6 9
3rd Judge 6 4 9 8 1 2 3 10 5 7
Use the rank correlation coefficient to determine which pair of judges has
the nearest approach to common tastes in beauty.
Solution: In order to find out which pair of judges has the nearest
approach to common tastes in beauty, we compare Rank Correlation
between the judgments of:
(i) 1st judge and 2nd judge
(ii) 2nd judge and 3rd judge and
(iii) 1st judge and 3rd judge
204
Computation of rank correlation
Rank by Rank by Rank by (R1- R2)2 (R2- R3)2 (R1-
1st judge 2nd judge 3rd judge D2* D2 R3)2
R1 R2 R3 D2
3 6 4 9 25
1
5 4 1 1 4
6
8 9 9 1 16
5
4 8 36 16 4
10
7 1 16 36 4
3
10 2 64 64 0
2
2 3 4 1 1
4
1 10 64 81 1
9
6 5 1 1 4
7
9 7 1 4 1
8
N = 10 N = 10 ∑D2 = 200 ∑D2 = 214 ∑D2 =
N = 10
60
Rank correlation between the judgment of 1st and 2nd judges:

6∑𝐷 2
R = 1 - 𝑁3−𝑁 = ∑D2= 200, N = 10
6 𝑋 200 1200
∴ R(I and II) 1- 103 −10= 1 - = 1 – 1.212 = 0.212
990
Rank correlation between the judgment of 2nd and 3rd judges:

6∑𝐷 2
R = 1 - 𝑁3−𝑁 = ∑D2= 214, N = 10
6 𝑋 214 1284
∴ R(II and III) 1- 103 −10= 1 - = 1 – 1.297 = 0.297
990
Rank correlation between the judgment of 1st and 3rd judges:

6∑𝐷 2
R=1- = ∑D2= 60, N = 10
𝑁 3 −𝑁
6 𝑋 60 360
∴ R(I and III) 1- 103−10= 1 - 990 = 1 – 1.364 = 0.636
Since the coefficient of correlation is maximum in the judgment of the first

and third judges, we conclude that have the nearest approach to common
tastes in beauty.
18.3 MANN-WHITNEY U TEST

This test is sometimes referred to as Wilcoxon rank test, uses rank just as
205
the previous test did. It is analogous to the t-test for continuous variable
but can be used for ordinal data. This test compares 2 independent
populations to determine whether they are different. The sample values
from both sets of data are ranked together. Once the 2 test statistics are
calculated, the smaller one is used to determine significance. Unlike the
previous tests, the null hypothesis is rejected if the test statistic is less
than the critical value. The U-value table is not as widely available as the
previous tables, but most statistical software will give a p-value and state
whether statistical difference exists.
Example 1:Mann whitney U test for the following data
53,38,69,57,46,39,73,48,73,74,60,78
44,40,61,52,32,44,70,41,67,72,53,72,
Significance Level α=0.05 and One-tailed test
Solution:
Step-1: Take the hypothesis
Null Hypothesis H0 : The two populations are equal

Alternative Hypothesis H1 : The two populations are not equal
Step-2: Ranking all group values

First we assign ranks to all observations using low to high ranking process in the
combined sample.
Size in Ascending Ran Name of related Rank for Rank for

Order k sample A B
A for sample, B for
sample
1 B 1
32
2 A 2
38
3 A 3
39
4 B 4
40
5 B 5
41
6.5 B 6.5
44
6.5 B 6.5
44
8 A 8
46
9 A 9
48
10 B 10
52
206
11.5 B 11.5
53
11.5 A 11.5
53
13 A 13
57
14 A 14
60
15 B 15
61
16 B 16
67
17 A 17
69
18 B 18
70
19.5 B 19.5
72
19.5 B 19.5
72
21.5 A 21.5
73
21.5 A 21.5
73
23 A 23
74
24 A 24
78
167.5 132.5
Total
The rank total for A is R1=167.5

The rank total for B is R2=132.5
We have n1=12 and n2=12
Step-3: Compute test statistic

test statistic using R1
n1 (n1 +1)
U1=n1⋅n2+n1 2
− R1
12 (12+1)
= 12. 12 + 2
− 167.5
= 144 + 78 - 167.5
= 54.5
n n 12.12
μU= 12 2 = 2 = 72
n1 n2(n1 +n2+1) 12.12.(12+12+1)
σU √ 12
=√ 12
= 17.3205
According the limits of acceptance region, keeping in view 10% level of

significance.
As the z value for 0.45 of the area under the normal curve is 1.64, we have the
following limits of acceptance region.
207
Upper limit = μU+1.64σU=72+1.64⋅17.3205=100.4056
Lower limit = μU-1.64σU=72-1.64⋅17.3205 = 43.5944
The value of U1 is 54.5 which is in the acceptance region, we accept the null
hypothesis and conclude that the two samples come from identical populations at
10% level.
test statistic using R2
n (n +1)
U2=n1⋅n2 2 22 − R1
12 (12+1)
= 12. 12 + 2
− 132.5
=144 + 78 - 132.5
=89.5
The value of U2 also lies in the acceptance region and as such our conclusion
remains the same.
18.4 KRUSKAL-WALLIS TEST
The Kruskal-Wallis test uses ranks of ordinal data to perform an analysis
of variance to determine whether multiple groups are similar to each other.
This test, like the previous example, ranks all data from the groups into 1
rank order and individually sums the different ranks from the individual
groups. These values are then placed into a larger formula that computes
an H-value for the test statistic. The degrees of freedom used to find the
critical value is the number of groups minus
Example-1: In a manufacturing unit, four teams of operators were
randomly selected and sent to four different facilities for machine
techniques training. After the training, the supervisor conducted the exam
and recorded the test scores. At 95% confidence level does the scores
are same in all four facilities?
Solution:
• Null Hypothesis H0: The distribution of operator scores are same
• Alternative Hypothesis H1: The scores may vary in four facilities
Rank the score in all the facilities
208
N=16
While for a right tailed chi-square test with 95% confidence level, and df
=3, critical χ2 value is 7.81
Critical values of Chi-Square Distribution
Calculated χ2 value is greater than the critical value of χ2for a 0.05

significance level. χ2calculated >χ2critical hence reject the null hypotheses
209
So, there is enough evidence to conclude that difference in test scores
exists for four teaching methods at different facilities.
18.5 MULTIPLE CORRELATION
Multiple correlation (sometimes called multiple regression correlation or
multiple linear correlation) is an extension of linear correlation that permits
researchers to correlate a set of independent variables with a single
dependent variable.
Example 1: The following zero-order correlation coefficients are given
r12 = 0.98, r13 = 0.44 and r23=0.54
Calculate multiple correlation coefficient treating first variable as

dependent and second and third variables as independent.
Solution: We have to calculate the multiple correlation coefficient treating
first variable as dependent and second and third variables as
independent, i.e., we have to find R1.23.
2 +𝑟 2 −2 𝑟 𝑟 𝑟
𝑟12 13 12 13 23
R1.23 = √ 2
1− 𝑟23
Substituting the given values
(.98)2 +(.44)2 +2 (.98)(.44)(.54)

R1.23 = √
1− (.54)2
.9604+.1936+.4657
=√ = 0.986.
7084
18.6 MULTIPLE REGRESSION ANALYSIS

Multiple regression is a specific statistical technique that can help people
understand the relationship between one dependent variable and two or
more independent variables. Because multiple regression allows for more
variance, it provides analysts with the ability to make optimal predictions
of the response variable’s outcomes.
Example 1: Given the following, determine the regression equation of
(i) x1 on x2 and x3
(ii) x2 on x1 and x3
f12 = 0.8 f13 = 0.6 f23 = 0.5
𝜎1 = 10 𝜎2 = 8 𝜎3 = 5
Solution: (i) Regression equation of X1 on X2 and X3 is given by
210
If the variates X1, X2, X3 are measured as deviations from their respective
means. ‘a’ will be zero. The values of b12.3 and b13.2 can be calculated from
the data given above but not for ‘a’. So let us assume x1 on x2 and x3 is
X1 = b12.3 x2 + b13.2 x3
𝜎1 𝑟12− 𝑟12 𝑟23
b12.3 x2 = x 2
𝜎2 1−𝑟23
10 0.8−(0.6)(0.5)
= 8
x 1−(0.5)2
= 0.833
𝜎 𝑟13− 𝑟12 𝑟23
b13.2 x2 = 𝜎1 x 2
1−𝑟23
3
10 0.6−(0.8)(0.5)
= x = 0.533
5 1−(0.5)2
∴ Required regression equation is
X1 = 0.833 x2 + 0.533 x3
(ii) Regression equation of x2 on x1 and x3

X2 = b12.3 x1 + b23.1 x3
𝜎 𝑟12− 𝑟23 𝑟13
b12.3 x2 = 𝜎2 x 2
1−𝑟13
1
8 0.8−(0.5)(0.6)
= 10 x 1−(0.6)2
= 0.833
8 0.8−0.3
= 10 x 1−0.36
8 0.5
= x = 0.625
10 0.64
𝜎2 𝑟 𝑟 𝑟
b23.1 = x 23− 122 13
𝜎3 1−𝑟13
8 0.5−(0.8)(0.6) 8
=5x 1−(0.6)2
= 5
x
0.02
0.64
= 0.05
Thus x2 = 0.625, x1 = + 0.05 x3.

18.7 REGRESSION ANALYSIS
Regression is a statistical method used in finance, investing, and other
disciplines that attempts to determine the strength and character of the
relationship between one dependent variable (usually denoted by Y) and
a series of other variables (known as independent variables).
Regression Equation on the basis of normal equations
Example 1: From the following data, determine the regression equations
X on Y and Yon X by normal equations.
211
X 6 2 10 4 8
Y 9 11 5 8 7
Solution:
Calculation of Regression Equations
X Y XY X2 Y2
6 9 54 36 81
2 11 22 4 121
10 5 50 100 25
4 8 32 16 64
8 7 56 64 49
∑X = 30 ∑Y = 40 ∑XY = 214 ∑X2 = 220 ∑Y2 = 340
(i) Regression equation X and Y is expressed as follows:

X = a + bY
To determine the value of a and b, the following two normal equations
are to be solved simultaneously.
Regression line X on Y is
∑X = Na + b∑XY ∑X = 30, N= 5, ∑Y = 40
∑XY = a∑Y + b∑y 2
∑XY = 214; ∑Y=40; ∑Y2=340
Substituting the values,
30 = 5a + 320b
214 = 40a + 340b
Multiplying the equation (i) by 8
240 = 40a + 320b
214 = 40a + 340b
______________
26 = -20b
20b = -26
−26
b = 20 = -1.3
Substituting the value of b in equation (i)

30 = 5a + 40(-1.3)
30 = 5a – 52
212
-5a = 52 – 30
-5a = -82
−82
a= −5
= 16.4
Putting the values of a and b in the equation, the regression line of X on

Y is
X = 16.4 – 1.3Y
(ii) Regression line Y and X is expressed as follows:
Y = a + bX
(To determine the value of a a& b the following two normal equations are
to be solved simultaneously)
∑Y = Na + b∑X ∑Y = 40; N = 5; ∑X = 30
∑XY = a∑X +b∑X2 ∑XY = 214; ∑X = 30; ∑X2 = 220
Substituting the values,
40 = 5a + 30b
214 = 30a + 220b
Multiplying the equation (i) by 6
240 = 30a + 180b

214 = 30a + 220b
_______________________
26 = -40b
40b = -26
−26
b= 40
= 0.65
Substituting the values of b in equation (i)

40 = 5a + 30(-0.65)
40 = 5a – 19.5
-5a = 19.5 – 40
-5a = 59.5
−59.5
a= 5
= 11.9
Putting the values of a and b in equation, the regression line of Y on X is

Y = 11.9 – 0.65X
213
Example 2: From 10 observations on price (X) and supply (Y) of a
commodity, the following summary figures are obtained.
∑X = 130; ∑Y = 220; ∑X2= 2288; ∑XY = 3467
Compute the regression equation Y and X by the method of least squares

and estimate the supply when price is 20.
X and Y denote actual variables and not deviation. The regression
equation shall be obtained by the method of least squares.
Regression equation Y on X
Y = a + bX
To find the value of a and b, the following normal equation are to be solved
simultaneously.
∑Y = Na + b∑X
∑XY = a∑X +b∑X2
N = 10; ∑X = 130; ∑Y = 220; ∑XY = 3469; ∑X2 = 2288
Substituting the values.

220 = 10a + 130b
3467 = 130a + 2288b
Multiplying the equation (1) by 13
2860 = 130a + 1690b
3467 = 130a + 2288b
__________________
-607 = -598b
598b = 607
607
b = 598 = 1.02
substituting the value of b in equation (1)

220 = 10a + 130b
220 = 10a + 130(1.02)
220 = 10a + 132.60
-10a = 132.60 – 220
-10a = -87.40
214
a = 8.74
Y = a + bX
Y = 8.74 + 1.02X
When X = 20, Y will be,
Y = 8.74 + 1.02(20)
Y = 8.74 + 20.40 = 29.14
Deviations taken from Arithmetic means of X and Y
Instead of dealing with actual values of X and Y as shown in problem 1,
we can take deviations of X and Y series from the respective arithmetic
mean to simplify the calculations.
(i) Regression equation X on
𝜎𝑥
𝑋− 𝑋=𝑟 (𝑌 − 𝑌)
𝜎𝑦
𝜎𝑥 ∑𝑥𝑦
=𝑟 𝜎𝑦
= ∑𝑦 2
𝑋 indicates arithmetic mean of X series
𝑌 indicates arithmetic mean of Y series.
(ii) Regression equation Y on X
𝜎𝑦
𝑌− 𝑌=𝑟 (𝑋 − 𝑋)
𝜎𝑥
𝜎𝑦 ∑𝑥𝑦
= 𝑟 𝜎𝑥 = ∑𝑥 2
18.8 OTHER NON-PARAMETRIC TEST

The most frequently used other non-Parametric tests are:
• Analysis of similarities
• Anderson–Darling test: tests whether a sample is drawn from a
given distribution
• Statistical bootstrap methods estimate the accuracy/sampling
distribution of a statistic
• Cochran's Q: tests whether k treatments in randomized block
designs with 0/1 outcomes have identical effects
• Cohen's kappa: measures inter-rater agreement for categorical
items
• Friedman two-way analysis of variance by ranks: tests
whether k treatments in randomized block designs have identical
effects
• Kaplan–Meier estimates the survival function from lifetime data,
modeling censoring
215
• Kendall's tau: measures statistical dependence between two
variables
• Kendall's W: a measure between 0 and 1 of inter-rater agreement
• Kolmogorov–Smirnov test: tests whether a sample is drawn from
a given distribution, or whether two samples are drawn from the
same distribution
• Kruskal–Wallis one-way analysis of variance by ranks: tests
whether > 2 independent samples are drawn from the same
distribution
• Kuiper's test: tests whether a sample is drawn from a given
distribution, sensitive to cyclic variations such as day of the week
• Logrank test: compares survival distributions of two right-skewed,
censored samples
• Mann–Whitney U or Wilcoxon rank sum test: tests whether two
samples are drawn from the same distribution, as compared to a
given alternative hypothesis.
• McNemar's test: tests whether, in 2 × 2 contingency tables with a
dichotomous trait and matched pairs of subjects, row and column
marginal frequencies are equal
• Median test: tests whether two samples are drawn from
distributions with equal medians
• Pitman's permutation test: a statistical significance test that yields
exact p values by examining all possible rearrangements of labels
• Rank products: detects differentially expressed genes in replicated
microarray experiments
• Siegel–Tukey test: tests for differences in scale between two
groups
• Sign test: tests whether matched pair samples are drawn from
distributions with equal medians
• Spearman's rank correlation coefficient: measures statistical
dependence between two variables using a monotonic function
• Squared ranks test: tests equality of variances in two or more
samples
• Tukey–Duckworth test: tests equality of two distributions by using
ranks
• Wald–Wolfowitz runs test: tests whether the elements of a
sequence are mutually independent/random
• Wilcoxon signed-rank test: tests whether matched pair samples
are drawn from populations with different mean ranks
216
18.9 APPLICATION OF NON-PARAMETRIC TEST
Parametric Nonparametric
Analysis Type Example
Procedure Procedure
Compare means Is the mean Two- Wilcoxon rank-

between two annual sample t- sum test
distinct/independent temperature of test
groups extreme
southern Kano
different from the
mean annual
temperature of
extreme northern
Kano?
Compare two Was there a Paired t- Wilcoxon

quantitative significant test signed- rank
change in soil test
measurements
fertility between
taken from the
a soil which
same individual
inorganic
fertilizers was
applied and the
same soil which
group which
organic manure
was applied after
one year?
217
Compare means If our experiment Analysis of Kruskal-Wallis
between three or had three rock test
variance
more types (e.g.,
distinct/independent igneous, (ANOVA)
groups sedimentary and
metamorphic),
we might want to
know whether
the mean
mineral content
at baseline
differed among
the three
groups?
Estimate the degree Is excessive Pearson Spearman’s

of association deforestation rank correlation
coefficient
between two associated with
of
quantitative soil erosion?
correlation
variables
18.10 PARAMETRIC TEST VS NON-PARAMETRIC TEST
Parametric tests Non-parametric tests
1. They make numerous or 1. They do not make numerous or

stringent assumptions about stringent assumptions about
parameters. parameters.
2. A parametric test focuses on 2. Non-parametric tests focus on

the mean difference, and order or ranking. Data are changed
equivalent non-parametric test from scores to ranks or signs
focuses on the difference
between medians.
3. These populations must have 3. Variable under study has

the same variances. underlying continuity
218
4. Parametric statistical 4. Nonparametric statistical
procedures rely on assumptions procedures rely on no or few
about the shape of the assumptions about the shape or
distribution (i.e., assume a parameters of the population
normal distribution) in the distribution from which the sample
underlying population and about was drawn.
the form or parameters (i.e.,
means and standard deviations)
of the assumed distribution.
18.11 ADVANTAGES OF NON-PARAMETRIC TEST

In non-parametric tests, data are not normally distributed. Most
psychological data are measured “somewhere between” ordinal and
interval levels of measurement. The good news is that the “regular stats”
are pretty robust to this influence, since the rank order information is the
most influential (especially for correlation-type analyses). Probability
statements obtained from most nonparametric statistics are exact
probabilities, regardless of the shape of the population distribution from
which the random sample was drawn.
Non-parametric tests accommodate very small samples. If sample sizes
as small as N=6 are used, there is no alternative to using a nonparametric
test.
Non-parametric tests can treat samples made up of observations from
several different populations, can treat data which are inherently in ranks
as well as data whose seemingly numerical scores have the strength in
ranks. They are available to treat data which are classificatory and are
easier to learn and apply than parametric tests.
18.12 LIMITATIONS OF NON-PARAMETRIC TEST
Non-parametric tests lead to loss of precision and wastefulness of data.
They have low power and a false sense of security. They lack software
for quick and large-scale analysis.
Non-parametric tests are used for testing distributions only and higher-
ordered interactions are not dealt with.
They are generally less statistically powerful than the analogous
parametric procedure when the data truly are approximately normal. “Less
powerful” means that there is a smaller probability that the procedure will
tell us that two variables are associated with each other when they in fact
truly are associated. If you are planning a study and trying to determine
219
how many patients to include, a nonparametric test will require a slightly
larger sample size to have the same power as the corresponding
parametric test.
Another drawback associated with nonparametric tests is that their results
are often less easy to interpret than the results of parametric tests. Many
nonparametric tests use rankings of the values in the data rather than
using the actual data. Knowing that the difference in mean ranks between
two groups is five does not really help our intuitive understanding of the
data.
In short, nonparametric procedures are useful in many cases and
necessary in some, but they are not a perfect solution.
LET US SUM UP
Let us sum up this unit, in business research are trying to determine the
acceptability of hypothesis to reach a decision or scientific conclusion.
Here we have discussed various statistical tools such as Non-Parametric
tools chi-square test, spearman rank confident test, Mann-Whitney U test,
Kruskl-Wallis Test and other non-parametric test also. This unit will give
an in-depth understanding to the readers.
CHECK YOUR PROGRESS

1. The nonparametric equivalent of an unpaired samples t-test is
a) Sign test
b) Wilcoxon signed-rank test
c) Mann-Whitney U test
d) Kruskal-Wallis test
2. Compared to parametric methods, the nonparametric methods are
a) Less accurate
b) Less efficient
c) Computationally easier
d) (b) and (c)
3. Which of the following test uses rank sums?
a) F test
b) Chi-square and Sign tests
c) Runs test
d) Kruskal-Wallis and Wilcoxon test
4. The Wilcoxon rank-sum test can be
a) Upper tailed
b) Lower tailed
c) Either upper tailed or lower tailed
220
5. Compared to parametric methods, the nonparametric methods are
a) Less accurate
b) Less efficient
c) Computationally easier
d) (b) and (c) but not (a)
GLOSSARY
Non-Parametric : is an experiment that do not require the

Test underlying population for assumptions. It does
not rely on any data referring to any particular
parametric group of probability distributions.
Chi-square test : The Chi-Square test is a statistical procedure

for determining the difference between
observed and expected data.
Spearman Rank : Measures the strength and direction of

Co-efficient association between two ranked variables.
U-Test : The Mann-Whitney U test is a non-parametric

test that can be used in place of an unpaired t-
test. It is used to test the null hypothesis that
two samples come from the same population
or, alternatively, whether observations in one
sample tend to be larger than observations in
the other.
Kruskal-Wallis : is used to determine whether or not there is a

test statistically significant difference between the
medians of three or more independent groups.
SUGGESTED READINGS

McGraw Hill, India
221
House, Mumbai.
India
Hill, New Delhi,
WEB RESOURCES
1. Two sample non-parametric tests in Minitab - Bing video
2. Two sample non-parametric tests in SPSS - Bing video
3. Parametric and Nonparametric Statistical Tests - Bing video
4. Parametric & Non-Parametric Tests (PSY) - Bing video

1.c) 2.d) 3.d) 4.c) 5.d)
222
UNIT 19
COMPUTER SOFTWARE APPLICATION
IN RESEARCH
STRUCTURE
Overview
Learning Objectives
19.1 Types of Software – A Preview
19.1.1 SPSS
19.1.2 Statistics in the SPSS Based Software
19.1.3 Features of SPSS
19.1.4 Modules Available in SPSS
19.1.5 Application of SPSS Package
19.1.6 Uses of SPSS
19.1.7 Weakness in SPSS
19.2 Other Software’s
Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
Effective research requires more accurate inference, data analysis and
decision making. We have a lot of user-friendly, time-saving software,
while some of the software is commonly used and are now available
widely in research institutions; others are not so user friendly and are used
in a very limited way for scientific research. In this lesson we have to
discuss only about that software which is commonly used in business
research methods.
LEARNING OBJECTIVES

• explain the application of software in research.
• discuss the various software used in business research
• describe software-based data analysis and inference in research.
19.1 TYPES OF SOFTWARE – A PREVIEW
In business research methods various statistical software packages are
used to analyze and infer conclusions. The most important software
packages used in business research are SPSS, MINITAB, SAS, STATA,
223
S-PLUS, MATLAB, WINKS, STATISTICA, AMOS, SYSTAT, LISREL, and
so on.
19.1.1 SPSS
SPSS is expanded as Statistical Package for the Social Sciences. In
1960, three Stanford University graduate students developed the SPSS
statistical software system. SPSS is a multinational software company
that provides statistical products, marketing and sales analysis, quality
improvement, scientific research, government reporting and education,
SPSS software products run on most models of all major computers. The
SPSS products are a modular system and include SPSS professional
Statistics, SPSS advanced statistics, SPSS tables, SPSS trends, SPSS
categories, SPSS CHAID, SPSS LISREL, SPSS Developers kit, SPSS
Exact Test, Teleform and Mapinfo.
19.1.2 Statistics in the SPSS Based Software
The statistics in the SPSS based software consists of.
• Descriptive Statistics – includes cross tabulation, frequencies,

descriptive, explore, descriptive ratio statistics.
• Bi-variate statistics – includes, t-test, ANOVA, correlation, non-
parametric tests.
• Prediction for numerical outcome, linear regression.
• Prediction for identifying groups – includes factor analysis, cluster
analysis, discriminate analysis.
19.1.3 Features of SPSS
The features of SPSS are accessible via pull-down menus or can be
programmed with a proprietary 40L command syntax language.
Command syntax programming has the benefits of reproducibility,
simplifying repetitive tests and handling complex data manipulations and
analysis. From version 14 onwards SPSS can be drives externally by a
python or a VB.NET programme using supplied plug-ins, more
importantly, dimensions is a platform on which one can create customized
tools and branded application, including those using environments and
text or instant massaging. Centralizing survey data and streamlining or
automating routine tasks and processes. Dimensions can conduct more
sophisticated analysis. At present SPSS version 23.0 is more applicable
in modern research activities.
224
19.1.4 Modules Available in SPSS
The available modules in SPSS are:
• SPSS Program-ability Extension – added in version 23.0.
• SPSS Data validation added in version 23.0.
• SPSS Regression models.
• SPSS Advanced models.
• SPSS Classification Trees.
• SPSS Tables.
• SPSS Exact Tests.
• SPSS Categories.
• SPSS Trends.
• SPSS Conjoint.
• SPSS Missing Value Analysis.
• SPSS Map.
• SPSS Complex Samples.
19.1.5 Application of SPSS Package

The application of SPSS packages is;
• Charting Russian voting patterns and socio-economic
characteristics.
• A class developed with assistance from the US department of
education called New York City’s Lower East Side, 1880-1920.
• Teaching Post-Graduate degree students and also in applied
research to study survey data.
• Teaching at undergraduate and post graduate levels.
• Analysis of data from the Bangor Longitudinal study of Aging
and Older people in Europe’s Rural Areas.
• Analysis of questionnaire data research and teaching
profession.
19.1.6 Uses of SPSS
The uses are application of SPSS is;
• It helps to use particularly with the windows releases.

• It is more user friendly.
• It covers most routine analysis.
• It helps to present quality tables and graphs.
• The university site license enables all to use of SPSS with free
on cost, etc.
19.1.7 Weakness in SPSS

The following are the criticisms associated with SPSS;
225
• Problems in positioning graphics precisely on the pages.
• The graphic editor is not very versatile.
• It lacks many regression analysis techniques.
• It is very difficult to edit output.
• Problems with importing and exporting data in a variety of formats.
• It consists of limited functionality for complex analysis.
• In batch mode one error halts the whole file running.
• To operate the software, the operator needs knowledge of
statistical terminology.
19.2 OTHER SOFTWARE’S
i.MINI TAB
Minitab is a statistical analysis package by Minitab Inc. which was
established morethan 25 years ago. It can be used for learning about
statistics as well as statistical research. The statistical analysis package
having the advantage of being accurate, reliable, and generally faster
than computing statistics and drawing graphs by hand.
ii.SAS
Statistical Analysis System (SAS) is an integrated system of software
products provided by SAS Institute Inc. that enables the programmer to
perform, data entry, retrieval management, mining, statistical analysis,
business planning, forecasting, decision support, remote computing
quality improvement, applications development, etc. it is also used in
manufacturing sectors, telecommunication, government, environment
research, biotechnology, retail and so on.
iii. STATA
The name STATA is a portmanteau of the word’s statistics and data, it is
not an acronym and therefore should not appear with all letter
capitalized. STATA is a general-purpose statistical software package
created in 1985 by STATA Corp. It is used by many business and
academic institutions around the world. Especially, it is used in social
sciences research such as management, commerce, economics,
sociology, political science, public administrators, psychology,
epidemiology, etc. The main features are, fast, accurate, easy to use
data management facilities, graphics, matrix programming,
documentation services, etc
iv. S-PLUS
S-PLUS is a supported extension of the statistical analysis language S.

S was originally developed at AT&T Bell Labs (Recently split into AT&T
226
Laboratories and Lucent Bell Lab) by a team of researchers. S-PLUS is
a powerful software package used for professional statisticians and data
analysis, with the release of S-PLUS for windows, featuring pull down
menus and dialogs, the advanced statistical and visualization techniques
of S-PLUS have become easily accessible for users. Its graphical
interface has made S-PLUS very popular among a much wider group of
people than ever before.
v.MATLAB
MATLAB is an interactive computing environment that can be used for
scientific and statistical data analysis and visualization. The basic data
object in MATLAB is the matrix. The user can perform numerical
analysis, signal processing, image processing and statistics on matrices.
Thus freeing the user from programming considerations inherent in
other programming languages such as C and PORTAN, There are
versions of MATLAB for UNIX platforms, PC’s running, Microsoft
Windows and Macintosh. The functions are platform independent,
provides the user with maximum reusability of their work, it also offers
various modules or toolboxes.
vi. WINKS
The WINKS is one of the most well knows statistical packages which
helps in analyzing research data. WINKS come in two versions. WINKS
basic and WINKS professional. WINKS is designed for researchers who
need to get statistical answers quickly. Descriptive statistics such as
mean, standard deviation, variance, median, minimum, maximum,
standard error of the mean, percentage calculations, Tukey 5 number
summary, confidence intervals, and more. Non-parametric analysis
includes Mann - Whitney and Kruskal – Wall is analyses for independent
groups. Wilcoxon’s signed Rank test, Friedman’s test is provided for
paired or repeated measures analysis.
Frequency and cross tabulation include goodness of fit test, frequency
distribution, McNemars test, Fishers exact test, Yates chi-square, odd
ratios, and comparison of proportions. Regression and correlations
include correlation matrix, R-square, Adjusted R-square, Pearson’s and
spearman’s co-efficient tests for significance. Survival analysis includes
actuarial and Kaplan-meter life tables and comparison of survival curves,
and more. ANOVA and ANCOVA are also executed through WINKS.
Hence, it is mostly applicable software package in business research
methods.
227
vii. STATISTICA
STATISTICA Enterprise-wide Data Analysis System (SEDAS). SEDAS
is an integrated multi-user software system designed for general purpose
data analysis and business intelligence applications in research,
marketing, finance and other industries. SEDAS can optionally offer the
statistical functionality available in any or all of the STATISTICA
products. It is also used in integration with data warehouses, intuitive
query and filtering tools, easy to use administration tools, automatic
report distribution, alarm notification and so on.
viii. AMOS
AMOS implements the general approach to data analysis, structural
equation modeling is a multivariate analysis technique that
encompasses and extends standard methods, including regression,
factor analysis simultaneous equations and analysis of variance. Now
many researchers are using beyond traditional techniques such as
exploratory factor analysis and regression to explore complex
relationships, etc. AMOS software makes structural equation modeling
very easy. At present AMOS comes with two interfaces such as AMOS
Graphics and AMOS Basic.
ix.SYSTAT
SYSTAT is a high value integrated desktop statistics and graphics
software package for engineers and statisticians that provides a vast
selection of reliable statistics and high quality scientific and technical
graphing options at its price point, enabling users to analyse their data,
make meaningful discoveries and present their results more efficiently
than most others statistics or graphics tools. It also helps to manipulate
data, display graphic summaries, calculate numeric summaries and test
the validity of hypotheses about the data. It is mainly used in business
research, science and engineering, life sciences, medical research,
environmental sciences, geo-sciences, physics, chemistry,
telecommunication, etc. (SYSTAT Software Inc was established in 2001,
in California, USA)
x. LISREL
LISREL is statistical software for estimating the co-efficient in a set of
structural equations. PRELIS is a preprocessor of LISREL. PRELIS does
a fair amount of data screening before processing it with LISREL. It is
also used to compute a specified matrix for reading into a LISREL
session. The capabilities of LISREL include measurement models and
confirmatory factor analysis, causal models for directly observed models
228
for directly observed variables, structural equation model for latent
variables, analysis of ordinal and non-normal variables, multi-sample
analysis, linear and non-linear constraints, fitness measures, path
diagrams, etc. It is mostly used in business research methods.
LET US SUM UP
Let us sum up, computer software is the most widely used programs for
statistical analysis in social sciences research. It is mainly used in
marketing research, health research, survey companies, government
educational research, and banking and financial services etc. In this
lesson we had a brief discussion on various computer software’s and their
uses in business research involves SPSS, MINITAB, SAS, STATA, S-
PLUS, MATLAB, WINKS, STATISTICA, AMOS, SYSTAT, and LISREL.
It will give a clear insight to the students to understand the application of
different computer software used in business research.
CHECK YOUR PROGRESS

1. The “SPSS” is a package of programs for.
a) Manipulation
b) Analyzing
c) Presenting data
d) All of the above
2. The “SPSS” is more widely use in.
a) Social and behavioral sciences
b) Aerial science
c) a&b
3. SPSS base provides method for.
a) Data description
b) Linear regression
c) Simple inference
d) All of the above
4. In SPSS online help is provided from the.
a) Help menu
b) Context menu
c) Help button
d) All of the above
5. What does Matlab stand for?
a) Math Laboratory
b) Matrix Laboratory
c) Mathworks
229
GLOSSARY
SPSS : Statistical Package for the Social Sciences also known

as IBM SPSS Statistics, is a software package used for
the analysis of statistical data
MINI TAB : is statistical software used to analyze data. It mainly

targets six-sigma professionals. It provides a simple
approach to input statistical data and identifies the data
trends and patterns.
MATLAB : is a high-performance language for technical

computing. It integrates computation, visualization,
and programming in an easy-to-use environment
where problems and solutions are expressed in familiar
mathematical notation
STATA : is a powerful statistical software that enables users to

analyze, manage, and produce graphical visualizations
of data.
SUGGESTED READINGS

McGraw Hill, India
4. Kothari, C.R., (2019), Research Methodology, Fourth Edition,
New Age International (P) Ltd, New Delhi.
House, Mumbai.
India
Hill, New Delhi,
230
WEB RESOURCES
1. Research Methods for Management - MBA Online Tuition Class
for Distance MBA and Regular MBA Students - Bing video
2. What Is The Best Statistical Software For Researchers, PhDs, or
Professors in the 2020s? - YouTube
3. Introduction to MINITAB Statistical Software - Bing video
4. How to Get IBM SPSS Statistics Software (0-2) - Bing video
5. R Programming Tutorial - Learn the Basics of Statistical
Computing - Bing video
5. SEM | SPSS AMOS - Introduction to AMOS - Research Coach -
Bing video
1.d) 2.a) 3.d) 4.d) 5.b)
231
BLOCK 5
REPORT WRITING & ETHICAL ISSUES IN

RESEARCH
UNIT 20: PREPARATION OF RESEARCH REPORT

AND APPENDIX
232
UNIT 20
PREPARATION OF RESEARCH REPORT
AND APPENDIX
Structure
Overview
Learning Objectives
20.1 Research Report - Meaning
20.1.1 Purpose of Research Report
20.1.2 Characteristics of a Good Research
Report
20.1.3 Functions of a Research Report
20.1.4 Steps in Writing Research Report
20.1.5 Contents of Research Report
20.2 Types of Research Report
20.2.1 Research Report Format
20.2.2 Problems in Research Report writing
20.3 Typing the Research Report
20.4 Chapters Planning
20.5 Plagiarism
20.6 Synopsis
20.7 Research Proposal
20.8 Evaluation of Research Report
20.9 Viva-Voce Examination
20.10 Ethics in Research
20.10.1 Ethical issues in Research
20.11 Bibliography
20.12 Footnotes
20.12.1 Comparison of Bibliography and Footnote
20.13 References
20.14 Index
20.15 Quotations
20.16 Abbreviations
20.17 Acronyms
20.18 Figures
20.19 Comprehensive Table
20.20 Questionnaire / Schedule
20.21 Glossary of Terms
20.22 Common Abbreviation used in Research
20.23 Others
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Let us sum up
Check your progress
Glossary
Suggested Readings
OVERVIEW
The final but very important step in research work is o draft its report. The
research report is a means for communicating our research experience to
others and adding them to the food of knowledge. This lesson discusses
the purpose of research reports, types of reports, contents of reports,
functions of report, characteristics of a good research report, drafting and
finalizing of report and evaluation of research report. Appendices – is used
for additional or supplementary materials which has not place in the main
text. The appendix part includes introduction, bibliography, footnotes,
references, quotations, abbreviations, acronyms, figures, comprehensive
table, questionnaire / schedule, glossary of terms.
LEARNING OBJECTIVES
• State the purpose of the research report

• discuss the content of research report
• explain the types of reports
• discuss how to write bibliography, footnote and reference.
• assess the usage of figures in research reports.
• discuss the applications of abbreviations and quotations.
20.1 RESEARCH REPORT - MEANING
A research report is a formal statement of the research process and its
results. It narrates the problem studied, methods used for studying it and
the finding and conclusion of the study.
According to American Marking Society, its purpose is to convey to
interest persons the whole result of the study is sufficient detail and to
arrange as to enable each reader to comprehend the data to determine
himself the validity of the conclusions.
20.1.1 Purpose of Research Report
The purpose of the research report may be:
• To communicate with the interested person the methodology and
the results of the study in such manner.
• To understand the research process.
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• To determine the validity of conclusions.
• To encourage others to carry on research on the same or allied
areas.
• To guide future research to the discipline, etc.
20.1.2 Characteristics of a Good Research Report
The characteristics of a good research report is:
• The research report is a authoritative document on the outcome of
a research effort.
• It presents highly specific information for a clearly designated
audience.
• It is a simple, readable and accurate form of communication.
• The technical terms should be properly explained, etc.
20.1.3 Functions of a Research Report
The research report involves the following functions:
• The research report helps to present the problem which studied.
• The research report also assists to know the methods and
techniques used for collecting and analyzing the data.
• The research report also helps to provide the research findings,
conclusions and recommendations in an organized manner.
• The research report serves as basic reference material for future
use.
• The research report serves as a means for judging the quality of
the completed research work.
• The research report gives a factual base for formulating policies
and strategies to the subject studied.
• The research report provides systematic knowledge on problems
and issues analyzed.
• The research report helps to evaluate the researcher’s ability and
competency to do research.
20.1.4 Steps in Writing Research Report
The usual steps involved in writing a report is:

i. It requires logical analysis of the subject matter.
ii. Preparation of final outline.
iii. Preparation of rough draft.
iv. Rewriting and shaping of the rough draft.
v. Preparation of the final bibliography.
vi. Check out the mechanics of writing – spelling grammar and
usage of language.
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vii. Writing the final draft.
20.1.5 Contents of Research Report
The research report has to contain certain things relating to research
work. The contents of the research report is:
• Introduction – consists of research problem, importance of study
objectives of the study sponsoring agency, research methodology
including research design, nature of sample and data collection
technique.
• Review of existing literature related to the study
• Analysis and Inference – This is the most important out aspect of
the report that contains the analysis of the data collected and the
inferences drawn from the data.
• Extent of success achieved – the report must explain to what
extent the success has been achieved.
• Statistical diagrammatic and graphic presentation of the data – the
data collected has been analyzed and presented with the help of
diagrams, graphs, etc. The method of statistical analysis should
also be employed.
• Result – The basic rule in presenting findings is to give all the
evidence relevant to the research questions.
• Suggestions – The researcher has to give suggestions. These
suggestions are expected to be given in a practical shape. It
should be practical and based on logical reasoning and fact.
• Appendices and footnotes and bibliography – The report contains
statements and inferences from the original documents. The
questionnaire, schedule and other forms of statements are given
in the report as appendices. In giving footnotes the investigators
or the writer used as reference guides or brief explanations of the
points discussed.
20.2 TYPES OF RESEARCH REPORT
The research report may be classified into:
i. Technical Report / Thesis – Technical report is essentially technical
in nature scope and couched in technical language. It follows a
specified pattern and consists of several prefatory sections with
appropriate headings and paragraphs. The report covers all the
aspects of the research process: a description of the problem
studied, the objectives of the study, methods and technique used, a
detailed account of sampling, field and research procedure, sources
of data, tools of data collection, methods of data processing and
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analysis, detailed findings and conclusions and suggestions. These
are also a technical appendix for methodological details, copies of
measuring instructions, etc. It is also comprehensive and
comprehensive and complex that the study can be replicated by
others.
ii. Popular Report – is designed for an audience of executives or
administrators and other non-technical users. The requirements of
this audience are different. The reader is less concerned with
methodological details, but more interested in studying quickly the
major findings and conclusions. The reader is interested in applying
the findings to decisions. The format of this report is different from
that of a technical report. After a brief introduction to the problem and
the objectives of the study, an abstract of the findings, conclusions
and recommendations is presented. The methodological details,
data analysis and their discussion are presented in the second part.
More headings, underlining, pictures and graphs may be used.
Sentences and paragraphs should be short. The style may be more
journalistic but precise.
iii. Interim Report – may contain either the first results of the analysis
or the final outcome of the analysis of some aspects completely
analysed. The interim report facilitates the sponsoring agency to take
action without weightage for the full report. It contains a narration of
what has been done so far and what were their outcomes. It presents
a summary of the findings of that part of analysis which has been
completed.
iv. Summary Report – is generally prepared for the consumption of
general public. The presentation of this type of report is desirable for
any study whose findings are of general interest. It is written in non-
technical, simple language with a liberal use of pictorial charts. It
contains a brief reference to the objective of the study, its major
findings and their implications.
v. Research Abstract – is a short summary of the technical report. It is
usually prepared by the doctoral students at the time of submitting
thesis. The copies are sent by the university along with the letter of
request to the examiners invited to evaluate the thesis. It contains a
brief presentation of the statement of the problem, the objectives of
the study, methods and technique used and an overview of the
report. A brief summary of the results of the study may also be added.
vi. Research Article – is designed for publication in a professional
journal. If the study has two or more aspects that can be discussed
independently, it may be advisable to write separate articles rather
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than to stuff too many things into a single article. The research article
must be clearly written in concise and unambiguous language. It
must be logically organized, progressing from a statement of problem
and the purpose of the study, through the analysis of evidence, to the
conclusions and implications.
20.2.1 Research Report Format
The different types of report have been discussed on the previous pages.
But the headings of the sections and their order may differ from one
situation to another. The following is suggested as a broad sequence of
contents of a research report.
Prefatory items – consist of
• Title page
• Declaration of the Researcher
• Certificate of research supervisor.
• Acknowledgements
• Table of contents
• List of Tables
• List of Figures
• Abstract or synopsis
I. Main Body of the Report
• Introduction
• Review of literature
• Statement of research problem
• Objectives of the study
• Significance of the study
• Scope of the study
• Conceptual framework
• Methodology adopted
• Results – findings and discussions
• Summary, conclusions and recommendations
• Limitations of the study
• Suggestions for further research
• Chapterisation
II. Terminal Items – generally divided into
• Bibliography
• Appendices
• Glossary of terms (if any) and
• Index (if any)
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20.2.2 Problems in Research Report Writing
The research report writing is suffering from the following aspects:
• Failure to highlights the scope of the study.
• Lack of clarity in presentation.
• Faulty methodology.
• Lack of patience, negligence and carelessness in drafting research
report.
• Technical and tedious terms create another problem.
• Omission of relevant data gap between the tables and
conclusions.
• Further problems in cognizing the genuineness and authenticity of
finding.
20.3 TYPING THE RESEARCH REPORT
Keeping in touch with the requirements of the institution, the researcher
must take care to get the report typed. The researcher must take into
consideration the number of copies to be typed as per requirement. The
research must adhere to the regulation regarding margin, cover spacing,
symbols, quality and size of paper, font size used in typing, etc. as per the
guidelines of the research institution / university.
20.4 CHAPTERS PLANNING
The purpose of this lesson is to give guidance in preparing a research
report which is simply a presentation of finding a specific ordinance. The
chapterisation gives a clear view to present the report. It is planned with
the guidance of the research supervisor and the researcher Usually it may
be presented under the following heads:
• Introduction
• Review of literature
• Profile of the study
• Methodology
• Data Analysis and Interpretation
• Summary of findings, suggestions and conclusions.
20.5 PLAGIARISM
• Plagiarism – plagiarism is the failure to acknowledge the borrowed
material. Hence it amounts to copying the warrants in the business
world to legal action. So, it is immoral, illegal and punishable.
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20.6 SYNOPSIS
The research synopsis is the plan for your research project. It provides
the rationale for the research, the research objectives, the proposed
methods for data collection and recording formats and/or questionnaires
and interview guides.
20.7 RESEARCH PROPOSAL
A research proposal is a concise and coherent summary of your proposed
research. It sets out the central issues or questions that you intend to
address. It outlines the general area of study within which your research
falls, referring to the current state of knowledge and any recent debates
on the topic.
20.8 EVALUATION OF RESEARCH REPORT
The research report may be evaluated or reviewed in the following ways:
a research report thesis dissertation submitted to a university for award of
Ph.D degree is evaluated by Board of Examiners consisting of academic
experts in the concerned field of study.
The evaluation aims to judge the following:
• The appropriateness of the title
• Importance of research problems.
• Research problem formulation.
• Review of relevant literature
• Soundness of methodology.
• Data analysis
• Contributions of the study.\
• Conclusions and recommendations.
• Presentation of the report.
20.9 VIVA VOCE EXAMINATION
Viva Voce Examination – In most of the universities, a doctoral student is
required to appear for an oral examination conducted by Board
constituting of the chairman of the researcher’s department, external
examiners and the research guide. The faculty members of the
department and research scholars may attend the department and
research scholars may attend the via-voce meeting as observers. In some
universities the viva is open to the public. Anybody presents may put
questions to the researcher. The researcher is expected to defend thesis
in the viva voce examination.
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20.10 ETHICS IN RESEARCH
Research ethics refers to a set of values, standards, and institutional
schemes that constitute and regulate scientific activity. The national
committee for research ethics in Norway was appointed by the ministry of
education, Norway in 1990. The important guidelines recommended by
the committee in given briefly:
• The ethical guidelines are applicable to any branch of knowledge.
• Research ethics embraces both personal and institutional morality.
• The ultimate responsibility of research is to seek truth.
• Ethical views and attitudes raise their awareness of conflicting
standards and promote goods judgment.
• Research institutions and research bodies are facilitated free and
independent in research.
• Research ethics help to promote the value of human life.
• Data collected for one particular research purpose cannot
automatically be used for another research.
• The requirements for professional independence and peer review
are also universal.
• The basic research standards should however be based on the
general moral standards of society.
20.10.1 Ethical issues in Research
Ethics when applied to social research is concerned with the creation of a

trusting relationship between those who are researched and the
researcher. To ensure that trust is established it is essential that
communication is carefully planned and managed, that risks are
minimised and benefits are maximised. In developing a trusting
relationship, researchers adhere to a number of ethical principles which
they apply to their work - namely beneficence; autonomy; non-
maleficence; justice; veracity; and privacy.
• Beneficence (doing good) - Research should only be carried out
if some sort of benefit or good can be derived from it, (i.e.,
contribution to knowledge or improved service/treatment).
Therefore, the question of whether or not a research project is
worth undertaking should always be uppermost in the mind of the
researcher. If no benefit can be derived, then the project is
unethical.
• Autonomy (self-rule) - Researchers have an obligation to
disclose information at a level that participants can understand so
that they can either refuse or agree to participate. In essence,
autonomy is concerned with the concept of informed consent
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whereby people who agree to take part in a study know what they
agree to and authorize the researcher to collect information without
any form of coercion.
• Non-maleficence (do no harm) - The principle of non-
maleficence places an obligation on researchers not to harm
others or expose people to unnecessary risks. Harm can come in
many forms, from blows to self-esteem to ‘looking bad’ to others,
to loss of funding or earnings, to boredom, frustration, or time
wasting. It is good practice to assume that every research project
will involve some form of harm and to consider in advance how
best to deal with it.
• Justice (Fairness) - This principle implies that everyone should
be treated fairly and equally.
• Veracity (truth telling) - This principle concerns truth telling
whereby the researcher is required to provide comprehensive and
accurate information in a manner that enhances understanding.
For example, if the researcher says that a questionnaire will take
10 minutes to complete then the questionnaire should take 10
minutes and not 15 minutes. Researchers should always be
honest with participants and keep any promises made.
• Privacy - Privacy concerns the respect for limited access to
another person, be it physically, emotionally or cognitively. For
example, although participants grant access to their thoughts and
feelings when they agree to participate, they do not agree to
unlimited access. Therefore, they have always got the right to
decline to talk about certain issues or to answer specific questions.
• Confidentiality - is an extension of privacy but relates specifically
to the agreements made between the researcher and participants
about what can and cannot be done with information collected over
the course of a project. In most cases this will be determined and
subject to the legal constraints outlined in the Data Protection Act
1998.
Informed consent
Informed consent is best understood by looking at what it means to be

informed and to give consent. Being informed means that participants are
told everything that might or will occur during a study in a way in which
they can understand. Giving consent implies that a) the agreement to
participate is voluntary, free from coercion and undue influence and b)
that the person providing the consent is competent to make a rational and
mature judgement about taking part. If the criteria of being informed and
giving consent are met, then informed consent is said to be given.
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Does consent have to be in writing?
It is good practice to have consent in writing. In practice, however, this is
not always possible especially when undertaking focus groups. The
convention here is to go through the consent procedure with the group
and record on tape any objections. To prevent breaches of confidentiality,
consent forms with personal identifiable information attached should be
stored in a locked container away other from information about the project.
What information should be included on a consent form?
There are no hard and fast rules here; however, as a rough guide the
following sorts of things should be included:
• a heading stating the title, the organisation carrying out the
research and the name of the researcher.
• a statement of agreement to participate.
• a statement that indicates the length of time an activity is likely to
take.
• a statement that indicates what will happen to the information
collected.
• a statement about confidentiality and anonymity.
• Confirmation that there is no obligation to take part and that
participants have the right to withdraw or not answer questions.
• Signatures and date.
Optional statements that can be included:
• a statement that the purpose of any recording equipment used has
been explained.
• a statement that a leaflet has been provided, that the information
has been read and understood.
• a statement that indicates that permission has been granted to re-
contact participants about the project.
• a statement that indicates whether permission has been granted
for their name to be added to a database etc.
20,11 BIBLIOGRAPHIES
Bibliography - means book lists. It is a list of written sources either
published or unpublished, consulted in the preparation of the report
during the course of research books, periodicals, articles, government
documents, unpublished materials, pamphlets, films, micro, films, radio
or television broad costs, records, lectures, interviews, etc. for example
the bibliography is written as follows:
1. Name of the author (Last Name first)
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2. Name of the book
3. Name of the publisher
4. Place of publication
5. Year of publication
Kothrai C.R, Research Methodology, New Age International, Mumbai,
2014.
20.12 FOOTNOTES
Footnotes – indicates the source of information, as a rule, each footnote
given one reference. Footnotes are footnotes because they are
traditionally placed at the foot of the page. For example, the footnote is
written as follows:
1. Name of the author (First Name First)
2. Name of book
3. Name of the publisher
4. Place of publication
5. Year of publication
C.R Kothrai, Research Methodology, New Age International, Mumbai,
2014.
20.12.1 Comparison of Bibliography and Footnote
S.No Point of Bibliography Footnote

Comparison
1. Indentation Overhanging-first Regular paragraph

line flush with indentation
margin, second line
intended line spaces
2. Name order Last name first First name first
3. Placement End of the body of Bottom of page in the

report listed superscript
alphabetically by last
name of first author
4. Page reference Total number of The specific page

paper in book or in number of location is
article is given given.
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20.13 REFERENCES
References – are literature cited comprises a list of documents which is
confined only to those works actually cited he text or the footnotes of the
report. Usually, it is given at the end of the chapter.
20.14 INDEX
An index is a list of all the names, subjects and ideas in a piece of written
work, designed to help readers quickly find where they are discussed in
the text. Usually found at the end of the text, an index doesn’t just list the
content, it analyses it.
In addition to back-of-the-book indexes found in non-fiction books and

technical reports, indexes are also used to make other sources of
information – including journal articles, maps and atlases, art collections,
online databases and websites – easier to navigate. Where books are
published online, in PDF or e-book format, indexes link directly to points
in the text. An index provides a map to a report’s content. It does this
through identifying key themes and ideas, grouping similar concepts,
cross-referencing information and using clear formatting. A good index
consists of:
• be arranged in alphabetical order

• include accurate page references that lead to useful information on
a topic
• avoid listing every use of a word or phrase
• be consistent across similar topics
• use sub-categories to break up long blocks of page numbers
• use italics for publications and Acts
• Cross-reference information to point to other headings of interest or
preferred terms.
20,15 QUOTATIONS
Quotations – A research report should not be stuffed with quotations.
Where quotations are used, that should be brief, not exceeding one or
lines substantiating the views that are already expressed in the analysis.
20.16 ABBREVIATIONS
Abbreviations – are also used and expanded.
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20,17 ACRONYMS
Acronyms - an abbreviation formed from the initial letters of other words
and pronounced as a word
20.18 FIGURES
Figures – are consecutively named and numbered. The figures usually
given in the reports are graphs, pie-charts, area chart, volume chart,
pictorial charts, maps diagrams, photographs, etc.
20.19 COMPREHENSIVE TABLE
A comprehensive table involves large and lengthy tables and diagrams
given at the end with the reduced form.
20.20 QUESTIONNAIRE / SCHEDULE
Questionnaire / Schedule is the instrument used for data collection which
should be given at end of the report.
20.21 GLOSSARY OF TERMS
A glossary, also known as a vocabulary, or clavis, is an alphabetical list
of terms in a particular domain of knowledge with the definitions for those
terms. Traditionally, a glossary appears at the end of a book and includes
terms within that book that are either newly introduced, uncommon, or
specialized.
20.22 COMMON ABBREVIATION USED IN RESEARCH
Certain English and Latin abbreviations are quite often used in
bibliographies and footnotes to eliminate tedious repetition. The following
is a partial list of the most common abbreviations frequently used in report-
writing (the researcher should learn to recognise them as well as he
should learn to use them):
anon., anonymous
ante., before
art., article
aug., augmented
bk., book
bull., bulletin
cf., compare
ch., chapter
col., column
246
diss., dissertation
ed., editor, edition, edited.
ed. cit., edition cited
e.g., exempli gratia: for example
eng., enlarged
et.al., and others
et seq., et sequens: and the following
ex., example
f., ff., and the following
fig(s)., figure(s)
fn., footnote
ibid., ibidem: in the same place (when two or
more successive footnotes refer to the same work,
it is not necessary to repeat complete reference for
the second footnote. Ibid. may be used. If different
pages are referred to, pagination must be shown).
id., idem: the same
ill., illus., or illust(s). illustrated, illustration(s)
Intro., intro., introduction
l, or ll, line(s)
loc. cit., in the place cited; used as op.cit., (when new
reference
loco citato: is made to the same pagination as cited in the
previous note)
MS., MSS., Manuscript or Manuscripts
N.B., nota bene: note well
n.d., no date
n.p., no place
no pub., no publisher
no(s)., number(s)
o.p., out of print

op. cit: in the work cited (If reference has been made to a work
247
opera citato and new reference is to be made,
ibid., may be used, if intervening reference has
been made to different works, op.cit. must be used.
The name of the author must precede.
p. or pp., page(s)
passim: here and there
post: after
rev., revised
tr., trans., translator, translated, translation
vid or vide: see, refer to

viz., namely
vol. or vol(s)., volume(s)
vs., versus: against
20.23 OTHERS
a. Tables – are numbered consecutively throughout the entire report.
b. Pagination – page numbers are assigned to each page of the
report.
c. Maps – assist in identifying the geographical location of the study
areas.
d. Hints for using paper for report writing -
e. Paper size – A4
f. Front Page – As prescribed by the university
Font – Times New Roman
a. Main Heading – 16pt
b. Subheading – 14pt
c. All Other Headings – 12pt
d. Main text – 12pt
No Page Boarders - until specifically feasible
Text colour – Automatic for text but diagrams may be in colour
Paragraph Alignment – Justified
Line spacing – 2 (or) 1.5 line spacing through document.
Marins 1.5” margin on the left side.
Do not underline the text
Text should be free from unusual formatting
248
Do not use table format for the content page
Do not break tables or diagrams in the two pages.
Divide the text in sections and present them with points
Like 1.0
1.1
1.1.1
1.1.2
1.1.3 etc.
Limit sections up to four points only
References for tables and figures are to be given below them only.
249
20.25 FRONT PAGE
IMPACT OF FINANCIAL LITERACY ON

SENIOR CITIZEN IN CHENNAI CITY
Thesis / dissertation submitted to the Tamil Nadu Open University as a partial

fulfillment of the requirements for the award of the degree of
Doctor of philosophy in commerce

Submitted by
Name of the candidate
Under the guidance and supervision of

Name of the guide and designation
Department of Commerce
Tamilnadu Open University
Chennai
July 2022
250
DECLARATION BY THE STUDENT
I declare that the thesis entitled “Impact of Financial Literacy on
Senior Citizen in Chennai City” is a record of independent

research work carried out by me under the supervision and
guidance of (Guide and Designation). This has not been
previously submitted for the award of any diploma, degree,
associateship or other similar title.
Chennai
Date Signature of the Candidate
CERTIFICATE
I certify that this thesis entitled “Impact of Financial Literacy on
Senior Citizen in Chennai City” Submitted to Tamil Nadu Open

University Chennai for the award of Ph.D Degree is a record of
independent research work carried out by (name of the candidate
and Designation) under the supervision and guidance. This has
not been previously submitted for the award of any degree
diploma, associateship or other similar title.
Chennai
Date Signature of the Guide
LET US SUM UP
Let us sum up, we had a good discussion on the preparation of the
research report. The research report is a formal statement of the research
process and its results. It gives the details of the problem studied,
methods used for studying it and the findings and conclusions of the study.
Here we have discussed the contents of a research report, types of
research report, chapter planning, evaluation of research report, etc. this
lesson will give a sharp idea to the readers to present research report.
Appendix which consists of some useful information like bibliography,
footnotes, differences between bibliography and footnote, reference,
abbreviations, acronyms, quotations, figures, paper size, suggested font
size in research, etc. Really this will give add-on information to the readers
251
CHECK YOUR PROGRESS
1. The first page of the research report is
a) Appendix
b) Bibliography
c) Index
d) Title page
2. The last page of the research report is
a) Appendix
b) Bibliography
c) Index
d) Title page
3. The content of the research report can be classified into three parts
which are
a. Prefatory items
a) Text
b) References
c) All of the above
4. Bibliography means
a) Foot Note
b) Quotations
c) List of Books referred
d) Biography
5. An abstract is a
a) Synopsis
b) Quotations
c) Glossary
d) Bibliography
6. At the end of the report, _____________ should be enlisted in respect
of all technical data such as questionnaires, sample information,
mathematical derivations and the like ones.
a) Annexures
b) Appendices
c) Bibliography
d) Summary
7. Which of the following is not a subsidiary part of a formal report?
a) Table of contents
b) References
c) Appendix
d) Glossary
8. The bibliography usually provides _______ to information
252
a) Multiple access points
b) A single access point
c) Double access points
d) All of the above
9. _______are used to cite authority for specific statements quoted or
phrased?
a) Index
b) Footnotes
c) Bibliography
d) Appendix
10. In research thesis is known as______
a) Research report
b) Monograph
c) Dissertation
d) Book
GLOSSARY
Research : is a well-crafted document that outlines the

Report processes, data, and findings of a systematic
investigation
Technical : is a formal report designed to convey technical

Report information in a clear and easily accessible format.
Plagiarism : is presenting someone else's work or ideas as

your own, with or without their consent, by
incorporating it into your work without full
acknowledgement.
Viva-Voce : is widely known as the viva, is an oral examination

Examination at the culmination of your project, M.Phil, PhD,
D.Lit, etc
Ethics in : is govern the standards of conduct for scientific

Research researchers. It is important to adhere to ethical
principles in order to protect the dignity, rights and
welfare of research participants.
Abstract : is a short statement about your paper designed to

give the reader a complete, yet concise,
understanding of your paper's research and
findings
253
Bibliography : is a list of books and other source material that you
have used in preparing a research paper.
Footnote : is a reference, explanation, or comment placed

below the main text on a printed page. Footnotes
are identified in the text by a numeral or a symbol.
In research papers and reports, footnotes
commonly acknowledge the sources of facts and
quotations that appear in the text.
Reference : is allows you to acknowledge the contribution of

other writers and researchers in your work.
Acronym : is an abbreviation of several words in such a way

that the abbreviation itself forms a pronounceable
word.
Abbreviation : are shortened forms of words and phrases and are

a common occurrence in research manuscripts as
they can help make highly complex technical
writing more concise and easier to read.
SUGGESTED READINGS
McGraw Hill, India
House, Mumbai.
India
New Delhi,
254
WEB RESOURCES
1. Preparation of Research Report - Bing video
2. How to write a psychological research report - Bing video
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1.d) 2.a) 3.d) 4.c) 5.a)
6.b) 7. C) 8.b) 9.b) 10.c)
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Master of Commerce
SECOND YEAR
(Semester - 03)
MCOS -33
INSURANCE AND RISK MANAGEMENT

www.tnou.ac.in
SYLLABUS
Course Title : INSURANCE AND RISK MANAGEMENT

Course Credit :3
CO1. Familiarize the learner’s competence in Insurance at an advanced

level
CO2. Focus on increasing proficiency on the principles of life insurance
and types of policies, premium and surrender
CO3. Impart knowledge on the principles of general insurance and types
of policies and preparation of relevant documents
CO4. Imbibe the regulations of IRDA
CO5. Make out on the various aspects of risk management related to the
Individual and Corporate Insurance Customers
COURSE SYLLABUS
BLOCK I: Introduction to Insurance

History of Insurance in world and India- Need for Insurance – Nature and
Working of Insurance - Major Types of Insurance and their Features –
Importance of Insurance Industry - Role of Insurance in Economic
Development – Insurance and Social Security - Reforms in the Insurance
Sector- IRDA- Privatization and Liberalization in India - Indian Insurance
Market- New Entrants to the Indian Insurance Market
BLOCK II: Principles of Life Insurance
Nature of Life Insurance-Principles of Insurance - Life Insurance Product –
Various Schemes – Characteristics of an Insurable risk - Role of Insurance-
Factors influencing Demand for Insurance - First Premium –Renewal –
Mode of Premium Payment – Limited Period Payment and Single Premium
- Lapse & Revival – Paid Up Policy – Deferment Period – Nomination &
Assignment of Policy – Bonus – Surrender Value
BLOCK III: Introduction to General Insurance
General Insurance- Concept and Need- Essential Features and
Requirements of Fire Policy, Loss of Profits Policy, Marine Cargo Policy,
Marine Hull Policy and Motor Insurance Policy including Vehicle and Third
Party Insurance- Miscellaneous Policies like Personal Accident, Fidelity
a
Guarantee, Health & Medi-claim, Burglary and Loss of Baggage- Co-
insurance, Double Insurance and Re-insurance- General Insurance Cover
Notes – Certificates of Insurance – Open Policy – Floater – Excess –
Franchise – Claims – Salvage – Coinsurance Loss: Total Loss, Actual or
Constructive Loss- Valued Policy – Agreed Value – Full Value – First Loss –
Increased Value – Insurance Time or Institute Cargo Clauses – Solatium
BLOCK IV: Insurance Regulatory and Development Authority
Insurance Market - Public Sector Pioneers in Life and General Insurance
Activities - Role of Insurance Agents and Brokers – Surveyors – Medical
Examiners – Third Party Administrators - Regulators: Insurance Regulatory
and Development Authority (IRDA) of India- Insurance Councils –
Ombudsmen – Educational Institutes – Councils – Tariff Advisory
Committee - Insurance Pricing: Factors and Determinants
BLOCK V: Insurance Customers
Individual and Corporate Insurance Customers – Nature of Insurance

Customers - Investment or Risk Management – Compulsion Vs
Voluntarism- Ethical Behavior – Risk Management Attitude- Control of Risk-
Avoidance, Prevention, Reduction, Retention or Transfer - Factors
Influencing Policyholder Satisfaction- Retention of Customers by Insurers.
REFERENCES
1. Alka Mittal and Gupta S L (2016), Principles of Insurance and Risk

Management, Sultan Chand & Sons, New Delhi
2. Harrington/Niehaus, (2013), Risk Management and Insurance, Tata
McGraw Hill, India.
3. Mishra M N (2015), Insurance-Principles and Practice, S. Chand &
Company, New Delhi.
4. Nalini P.Tripathy and PrabirPai, (2010), Insurance: Theory and Practice,
PHI, India
5. Periasamy P (2016), Principles and Practice of Insurance, Himalaya
Publishing House.
6. Rob Thoyts, (2012), Insurance Theory and Practice, Routledge, UK.
7. SahooS S and Das S C (2018), Insurance Management, Himalaya
Publishing House, Mumbai.
b
WEB RESOURCES
1. Basics Of Banking And Insurance | Download book

(freebookcentre.net)
2. INSURANCE AND RISK MANAGEMENT free ebooks and study
materials - Bing video
3. document.pdf - Google Drive

CLO1. Demonstrate knowledge of the Insurance at an advanced level
CLO2. Describe the basic Insurance, rules, policy, Risk in the workplace,
etc
CLO3. Gain knowledge on the principles of life insurance and types of
policies
CLO4. Understand the nature and types of non-life insurance policies
CLO5. Familiarize on the various aspects of risk management
c
CONTENTS
BLOCK/ CONTENTS PAGE

UNIT NO.
BLOCK 1 INTRODUCTION TO INSURANCE SECTORS 1
UNIT 1 HISTORY OF INSURANCE 02
1.1 Introduction to Insurance 02
1.2 Meaning of Insurance 07
1.3 Insurance –Definition 07
1.4 Need for Insurance 07
1.5 Nature and Working of Insurance 08
1.6 Working of Insurance 10
UNIT 2 TYPES OF INSURANCE 13
2.1 Introduction 14
2.2 Types of Insurance 14
2.3 Features of Insurance 19
2.4 Functions of Insurance 20
2.5 Importance of Insurance Industry 21
2.6 Role of insurance in economic development of 23
India
2.7 Benefits of Insurance 26
UNIT 3 INSURANCE AND SOCIAL SECURITY 28
3.1 Introduction to Social Security 29
3.2 Meaning of social Insurance 30
3.3 Main features of social insurance 30
3.4 Characteristics of social Insurance 31
3.5 Social Insurance and Commercial Insurance 31
3.6 Insurance as a Social Security Tool 32
3.7 Objectives of Social Security 33
3.8 Functions of Social Security 36
3.9 Insurance Development and Regulatory Authority 39
(IDRA)
d
3.10 Functions and duties of IRDA 41
UNIT 4 44
INDIAN INSURANCE MARKET
4.1 Introduction to Reforms of Insurance Sector in 45

India
4.2 Journey of Passing the Amendment Act 45
4.3 Insurance Regulatory & Development 47
Authority (IRDA)
4.4 Privatisation of Insurance 47
4.5 Liberalization in Insurance Sector 48
4.6 Indian Insurance market 50
4.7 New entrants to Indian Insurance Market 51
BLOCK 2 LIFE INSURANCE
UNIT 5 PRINCIPLES OF LIFE INSURANCE 57
5.1 Utmost good faith 58
5.2 Insurable interest 60
5.3 Concept and definitions of life insurance 61
5.4 Nature of life insurance 61
5.5 Principles of life insurance 64
5.6 Characteristics of life insurance 67
5.7 Life insurance products /type of life insurance 68
policies
5.8 Characteristics of insurable risk 74
UNIT 6 ROLE OF LIFE INSURANCE 78
6.1 Introduction 79
6.2 Importance of Life Insurance 79
6.3 Role of Life Insurance 83
6.4 Factors Influencing Demand for Insurance 84
6.5 Procedure for Taking a Life Policy 87
UNIT 7 PREMIUM POLICY AND MODE OF PAYMENT 92
7.1 Life Insurance Premium 93
e
7.2 Calculation of Life Insurance Premium 93
7.3 Types of Insurance Premiums 95
7.4 Modes of Paying your Premiums 96
7.5 Payment of First Premium 97
7.6 Life Insurance Renewal 97
7.7 Mode of Premium Payment 100
7.8 Limited Premium Payment 103
7.9 Single Premium Life Insurance 103
7.10 Lapsed Policy 106
7.11 Revive a lapsed Life Insurance Policy 106
UNIT 8 REVIVAL, BONUS AND SURRENDER VALUE 110
8.1 Renewal & Revival 111
8.2 Types of Revival schemes 112
8.3 Paid Up Policy 114
8.4 Deferment period 115
8.5 Nomination & Assignment of Policy 116
8.6 Difference between Nomination and 116
assignment
8.7 Meaning of Bonus in Insurance 117
8.8 Types of bonuses in insurance 117
8.9 Surrender Value 119
8,10 Kinds of life insurance have cash surrender values 120
BLOCK 3 GENERAL INSURANCE
UNIT 9 INTRODUCTION TO GENERAL INSURANCE 124
9.1 Introduction and Concepts of General Insurance 125
9.2 General Insurance Business Nationalization Act, 126
1972
9.3 Objectives of the Act 126
9.4 Importance / Need of General Insurance 127
9.5 Types of General Insurances in India 128
9.6 Advantages of General Insurance Plans 131
f
9.7 Present Structure of General Insurance in India 132
9.8 Principles of General Insurance 133
UNIT 10 FIRE AND MARINE INSURANCES 137
10.1 History of Fire Insurance 138
10.2 Meaning of Fire Insurance 138
10.3 Features of Fire Insurance 139
10.4 Fire Insurance Policy 141
10.5 Requirements of Fire Insurance Policy 141
10.6 Types of Fire Insurance Policies 141
10.7 Fire Loss of Profit Insurance 143
10.8 Introduction to Marine Insurance 144
10.9 History of Marine Insurance 145
10.10 Types of Marine Insurance 146
10.11 Types of Marine Insurance Policies 147
10.12 Marine Cargo Policy 150
10.13 Marine Hull Policy 152
10.14 Features of Marine Hull Insurance 152
UNIT 11 MOTOR INSURANCE 155
11.1 Motor Insurance Policy 156
11.2 Types of Motor Insurance Policy 158
11.3 Miscellaneous Insurance 160
11.4 Types of Miscellaneous Insurance Policies 160
11.5 Loss or Delay of Baggage 164
11.6 Coinsurance 165
11.7 Reinsurance 165
11.8 Double Insurance 167
UNIT 12 PROCESS OF GENERAL INSURANCE 170
12.1 Cover Notes 171
12.2 Certificate of Insurance (CoI) 172
12.3 Open Policy (OP) 174
12.4 Floater Insurance 175
12.5 Claim Excess or Claim Franchise 175
g
12.6 Salvage or Scrap 176
12.7 Total Loss or Constructive Total Loss 177
12.8 Valued Policy 178
12.9 Agreed Value Insurance 178
12.10 First Loss Policy 179
12.11 Increased Value Insurance 180
12.12 Insurance Time or Institute Cargo Clauses 180
12.13 Solatium 181
BLOCK 4 INSURANCE REGULATORY AUTHORITIES
AND INSURANCE MARKET
UNIT 13 INSURANCE MARKET 186
13.1 Insurance Market 187
13.2 Public Sector Pioneers in Life and General 188
Insurance Activities
13.3 Insurance Agents and Brokers 190
13.4 Role of Insurance Brokers 192
13.5 Responsibilities of an Insurance Agent 193
13.6 Surveyors 193
13.7 Medical Examiners 196
13.8 Third party administer 198
UNIT 14 INSURANCE REGULATORY AND 203
DEVELOPMENT AUTHORITY (IRDA)
14.1 Regulators in Insurance 203
14.2 History of IRDA 204
14.3 Salient features of IRDA Act 206
14.4 Salient Features of IRDA Guidelines for 207
Insurance Plans
14.5 Duties, Role and Functions of IRDA 210
UNIT 15 INSURANCE COUNCILS AND OMBUDSMAN 213
15.1 Insurance councils 214
15.2 Insurance Ombudsman 216
h
15.3 Educational Institutes 218
15.4 Tariff Advisory Committee 220
15.5 Insurance Pricing-Determinants 220
15.6 Insurance Pricing Methods 213
BLOCK 5 RISK MANAGEMENT
UNIT 16 INSURANCE CUSTOMERS AND ETHICAL 225
BEHAVIOUR
16.1 Introduction to Insurance Customers 226
16.2 Key customer categories in insurance 227
16.3 Types of Insurance Customers 230
16.4 Nature of Insurance Customers 238
16.5 Mindset as to Insurance 240
16.6 Insurance as Investment 242
16.7 Insurance Risk Management 244
16.8 Types of Risks in Insurance 245
16.9 Compulsion Vs. Voluntarism 248
16.10 Ethical Behaviour 249
UNIT 17 RISK MANAGEMENT- INSURANCE 256
17.1 Risk Management 257
17.2 Risk Management Process 257
17.3 Methods of Handling Risks / Risk Management 259
Techniques
17.4 Benefits of Managing Risk 264
17.5 Factors Influencing Policyholder Satisfaction 265
17.6 Customer Retention in the Insurance Industry 266
i
BLOCK 1
INTRODUCTION TO INSURANCE
SECTORS
UNIT 1 : HISTORY OF INSURANCE
UNIT 2 : TYPES OF INSURANCE

UNIT 3 : INSURANCE AND SOCIAL SECURITY
UNIT 4 : INDIAN INSURANCE MARKET
1
UNIT 1
HISTORY OF INSURANCE
STRUCTURE
Overview
Learning Objectives
1.1 Introduction to Insurance
1.2 Meaning of Insurance
1.3 Insurance- Definition
1.4 Need for Insurance
1.4.1 Removal of uncertainties
1.4.2 Stimulant of business enterprise

1.4.3 Promotion of saving
1.4.4 Correct distribution of cost
1.4.5 Source of credit
1.5 Nature of Insurance
1.5.1 Risk Sharing and Risk Transfer
1.5.2. Co-operative Device

1.5.3. Calculates Risk in Advance:
1.5.4. Payment of Claim at the Occurrence of Contingency
1.5.5. Amount of Payment:

1.5.6. Larger Number of Insured Persons
1.5.7. Insurance must not be confused with Charity or
Gambling
1.6 Working of Insurance
Let us sum up
Check your progress

Glossary
Suggested readings
2
OVERVIEW
Insurance is a contract between two parties. One party is the insured
and the other party is the insurer. Insured is the person whose life or
property is insured with the insurer. That is, the person whose risks are
insured is called insured. Insurer is the insurance company to whom risk
is transferred by the insured. That is, the person who ensures the risk of
insured is called insurer. Thus, insurance is a contract between insurer
and insured.
LEARNING OBJECTIVES
• describe history & evolution of insurance
• explain the characteristics of insurance
• narrate the need for insurance
• discuss the nature and working of insurance sectors
1.1 INTRODUCTION TO INSURANCE.
The idea of insurance took birth thousands of years ago. Yet, the
business of insurance, as we know it today, goes back to just two or
three centuries. Insurance has been known to exist in some form or
other since 3000 BC. Various civilizations, over the years, have
practiced the concept of pooling and dividing among themselves, all the
losses suffered by some members of the community. Insurance through
the ages - The Babylonian traders had agreements where they would
pay additional sums to lenders, as a price for writing off the loans, in
case a shipment was lost or stolen. These were called “bottomry loans”.
Similar practices were prevalent among the traders from Baruch and
Surat sailing in Indian ships to Sri Lanka, Egypt and Greece. The Greeks
had started benevolent societies in the late 7th century AD, to take care
of the funeral – and families – of members who died. The Friendly
societies of England were similarly constituted.
• The inhabitants of Rhodes adopted a practice whereby, if some
goods were lost due to jettisoning during distress, the owners of
goods (even those who lost nothing) would bear the losses in
proportion. Chinese traders in ancient days would keep their goods
in different boats or ships sailing over the treacherous rivers. They
assumed that if one of the boats suffered such a fate, the loss of
goods would be only partial and not total. The loss could be
distributed and thereby reduced.
3
• “The Great Fire of London” in 1666, in which more than 13000
houses were lost, gave a boost to insurance and the first fire
insurance company, called the Fire Office, was started in 1680.
• Lloyds: The origins of insurance business as practiced today, is
traced to the Lloyd’s Coffee House in London. Traders, who used
to gather there, would agree to share the losses to their goods
being carried by ships, due to perils of the sea. (Maritime perils,
such as pirates who robbed on the high seas or bad sea weather
spoiling the goods or sinking of the ship due to perils of the sea.) In
India, insurance has a deep-rooted history. It finds mention in the
writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and
Kautilya (Arthasastra). The writings talk in terms of pooling of
resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor
to modern day insurance. Ancient Indian history has preserved the
earliest traces of insurance in the form of marine trade loans and
carriers’ contracts. Insurance in India has evolved over time heavily
drawing from other countries, England in particular.
Evolution of insurance in modern India
• 1818 saw the advent of life insurance business in India with the
establishment of the Oriental Life Insurance Company in
Calcutta. This Company however failed in 1834.
• In 1829, the Madras Equitable had begun transacting life
insurance business in the Madras Presidency.
• 1870 saw the enactment of the British Insurance Act and in the
last three decades of the nineteenth century, the Bombay
Mutual (1871), Oriental (1874) and Empire of India (1897) were
started in the Bombay Residency.
• This era, however, was dominated by foreign insurance offices
which did good business in India, namely Albert Life Assurance,
Royal Insurance, Liverpool and London Globe Insurance and the
Indian offices were up for hard competition from the foreign
companies. In 1914, the Government of India started publishing
returns of Insurance Companies in India.
• The Indian Life Assurance Companies Act, 1912 was the first
statutory measure to regulate life business. In 1928, the Indian
Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and
non-life business transacted in India by Indian and foreign
insurers including provident insurance societies.
4
• In 1938, with a view to protecting the interest of the Insurance
public, the earlier legislation was consolidated and amended by
the Insurance Act, 1938 with comprehensive provisions for
effective control over the activities of insurers.
• The Insurance Amendment Act of 1950 abolished Principal
Agencies. However, there were a large number of insurance
companies and the level of competition was high. There were
also allegations of unfair trade practices.
• The Government of India, therefore, decided to nationalize
insurance business. An Ordinance was issued on 19th January,
1956 nationalizing the Life Insurance sector and Life Insurance
Corporation came into existence in the same year. The LIC
absorbed 154 Indian, 16 non-Indian insurers as also 75 provident
societies—245 Indian and foreign insurers in all. The LIC had
monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
• The history of general insurance dates back to the Industrial
Revolution in the west and the consequent growth of sea-faring
trade and commerce in the 17th century. It came to India as a
legacy of British occupation.
• General Insurance in India has its roots in the establishment of
Triton Insurance Company Ltd., in the year 1850 in Calcutta by
the British. In 1907, the Indian Mercantile Insurance Ltd, was set
up. This was the first company to transact all classes of general
insurance business.
• 1957 saw the formation of the General Insurance Council, a wing
of the Insurance Association of India. The General Insurance
Council framed a code of conduct for ensuring fair conduct and
sound business practices. In 1968, the Insurance Act was
amended to regulate investments and set minimum solvency
margins. The Tariff Advisory Committee was also set up then.
• In 1972 with the passing of the General Insurance Business
(Nationalization) Act, general insurance business was
nationalized with effect from 1 stJanuary, 1973. 107 insurers
were amalgamated and grouped into four companies, namely
National Insurance Company Ltd., the New India Assurance
Company Ltd., the Oriental Insurance Company Ltd and the
United India Insurance Company Ltd. The General Insurance
Corporation of India was incorporated as a company in 1971 and
it commence business on January 1sst 1973.
5
• This millennium has seen insurance come a full circle in a
journey extending to nearly 200 years. The process of re-opening
of the sector had begun in the early 1990s and the last decade
and more has seen it been opened up substantially. In 1993, the
Government set up a committee under the chairmanship of RN
Malhotra, former Governor of RBI, to propose recommendations
for reforms in the insurance sector.
• The objective was to complement the reforms initiated in the
financial sector. The committee submitted its report in 1994
wherein, among other things, it recommended that the private
sector be permitted to enter the insurance industry. They stated
that foreign companies be allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners.
• Following the recommendations of the Malhotra Committee
report, in 1999, the Insurance Regulatory and Development
Authority (IRDA) was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was
incorporated as a statutory body in April, 2000. The key
objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer
choice and lower premiums, while ensuring the financial security
of the insurance market.
• The IRDA opened up the market in August 2000 with the
invitation for application for registrations. Foreign companies
were allowed ownership of up to 26%. The Authority has the
power to frame regulations under Section 114A of the Insurance
Act, 1938 and has from 2000 onwards framed various
regulations ranging from registration of companies for carrying on
insurance business to protection of policyholders’ interests.
• In December, 2000, the subsidiaries of the General Insurance
Corporation of India were structured as independent companies
and at the same time GIC was converted into a national re-
insurer. Parliament passed a bill de-linking the four subsidiaries
from GIC in July, 2002. 2003: Introduction of Broker in Indian
Insurance market.
• Then Insurance industry transformed into monopoly and
Oligopolistic state or public sector insurance industry in India.
Today there are 31 general insurance companies including the
ECGC and Agriculture Insurance Corporation of India and 24 life
insurance companies operating in the country.
6
• The insurance sector is a colossal one and is growing at a
speedy rate of 15-20%. Together with banking services,
insurance services add about 7% to the country’s GDP. A well
developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure
development at the same time strengthening the risk-taking
ability of the country.
1.2 MEANING OF INSURANCE

Insurance means a promise of compensation for any potential future
losses. It facilitates financial protection against by reimbursing losses
during crisis. There are different insurance companies that offer wide
range of insurance options, and an insurance purchaser can select as
per own convenience and preference. Several insurances provide
comprehensive coverage with affordable premiums. Premiums are
periodical payment and different insurers offer diverse premium options.
The periodical insurance premiums are calculated according to the total
insurance amount. In other words, a promise of compensation for
specific potential future losses in exchange for a periodic payment.
Insurance is designed to protect the financial well-being of an individual,
company or other entity in the case of unexpected loss. Some forms of
insurance are required by law, while others are optional. Agreeing to the
terms of an insurance policy creates a contract between the insured and
the insurer. In exchange for payments from the insured (called
premiums), the insurer agrees to pay the policy holder a sum of money
upon the occurrence of a specific event. In most cases, the policy holder
pays part of the loss (called the deductible), and the insurer pays the
rest.
1.3 INSURANCE –DEFINITION
Dictionary of business and Finance defines “Insurance as a form of
contract agreement under which one party agrees in return for a
consideration to pay an agreed amount of money to another party to
make good a loss, damage or injury to something of value in which the
insured has a interest as a result of some uncertain event.”
Ghosh and Agarwal define “Insurance is an instrument of distributing
the loss of few among many. “
1.4 NEED FOR INSURANCE
1.4.1 Removal of uncertainties: Insurance company takes the risks of
large but uncertain losses in exchange for small premium. So, it gives a
sense of security, which is real gift to the businessman. If all uncertainty
7
could be removed from business, income would be sure. Insurance
removed many uncertainties and to that extent is profitable.
1.4.2 Stimulant of business enterprise: Insurance facilitates to
maintain the large size commercial and industrial organizations. No
large-scale industrial undertaking could function in the modern world
without the transfer of many of its risks to insurer. It safeguards capital
and at the same time it avoids the necessity on the part of industrialists.
They are therefore free to use their capital as may seem best.
1.4.3 Promotion of saving: Saving is a device of preparing for the bad
consequences of the future. Insurance policy is often very suitable way
of providing for the future. This type of policy is found particularly in life
assurance. It promotes savings by making it compulsory which has a
beneficial effect both for the individual and nation.
1.4.4 Correct distribution of cost: Insurance helps to maintain correct
distribution of cost. Every businessman tries to pass on to the consumer
all types of costs including accidental and losses also. In the various
fields of Insurance such losses are correctly estimated keeping in view a
vast number of factors bearing on them. In the absence of insurance
these losses and costs would be assessed and distributed only by guess
work.
1.4.5 Source of credit: Modem business depends largely on credit;
insurance has contributed ‘a lot in this regard. A life insurance policy
increases the credit worthiness of the assured person because it can
provide funds for repayment if he dies. Credit extension is also obtained
by means of various kinds of property insurance. A businessman who
stocks of goods has been properly insured can get credit easily.
Similarly marine insurance is an essential requirement for every
transaction of import and export.
1.5 NATURE AND WORKING OF INSURANCE
1.5.1 Risk Sharing and Risk Transfer: Insurance is a device to share
the financial losses, which might occur to an individual or his family on
the happening of a specified event. The event may be death of the
earning member of the family in the case of life insurance, marine perils
in marine insurance, fire in fire insurance and other certain events in
miscellaneous insurance, e.g., theft in burglary insurance, accidents in
motor insurance, etc. The loss arising from these events if insured are
shared by all the insured in the form of premium which they have already
paid in advance. Hence, the risk is transferred from one individual to a
group.
8
1.5.2.Co-operative Device: A group of persons who agree to share the
financial loss may be brought together voluntarily or through publicity or
through solicitations of the agents. An insurer, by ensuring a large
number of persons, is able to pay the amount of loss. Like all co-
operative devices, there is no compulsion here on anybody to purchase
the insurance policy (third party liability insurance in case of a vehicle
owner is an exception).
1.5.3. Calculates Risk in Advance: The risk is evaluated on the basis
of probability theory before insuring since the premium payable on a
policy is to be determined. Probability theory is that body of knowledge,
which is concerned with measuring the likelihood that something will
happen and making estimates on the basis of this likelihood.
1.5.4. Payment of Claim at the Occurrence of Contingency: The
payment is made on happening of a certain insured contingency. It is
true for all non-life insurances that payment will be made on the
happening of the specified contingency only. The life insurance claim is
a certainty, because the contingency of death or the expiry of term will
certainly occur, and the payment is certain.
1.5.5. Amount of Payment: The amount of payment depends upon the

value of loss suffered due to the happening of that particular insured
risk, provided insurance is there up to that amount. In life insurance, the
purpose is not to make good the financial loss suffered. Moreover, one
cannot estimate the value of a human being. A person is no doubt
precious to his/her family. The insurer promises to pay a fixed sum on
the happening of an event i.e. death or permanent disability. The amount
of loss at the time of contingency is immaterial in life insurance. But in
the property and general insurances, the amount of loss, as well as the
happening of loss, is required to be proved.
1.5.6. Larger Number of Insured Persons: The price of insurance is
basically linked to the cost of claims, which is only known subsequently.
In the beginning, it is an unknown factor, and an estimate is made on the
basis of past claims experience or empirical data about the longevity of
human beings, accidents and their financial consequences. Generally,
the past claims experience is repeated with minor variations if a large
number of risks are collected. This once again operates by the law of
large numbers and is one reason why insurance companies want to do
as much business as possible.
1.5.7. Insurance must not be confused with Charity or Gambling:
The uncertainty is changed into certainty by insuring property and life
because the insurer promises to pay a definite sum at damage or death.
9
In the absence of insurance, the property owner could at the best,
practice only some form of self-insurance, which may not give him
absolute certainty. A family is protected against losses on death and
damage with the help of insurance. From the point of view of an
insurance company, the insurance contract is essentially non
speculative. In fact, no other business operates with greater certainties.
From the insured’s point of view, too, insurance is also not gambling.
Failure of taking insurance, however, amounts to gambling because the
uncertainty of loss is always looming on the head. One could also say
that the insurance is just the opposite of gambling. In gambling, by
bidding, the person exposes himself to risk of losing, but the insured
safeguards himself through insurance, and may suffer loss only if he is
not insured.
1.6 WORKING OF INSURANCE
The insurance is nothing than a group of people feeling similar kind of
risk come together and decide to make contribution towards formation of
pool of funds to be used in case of crises arisen out of uncertain
happenings.
In the eventuality of happening an event of loss on account of any risk

(for which the pool was created) the member of the group is
compensated out of the same pool of funds. Contribution to the pool is
made by a group people sharing common risk and collected by the
insurance companies which is popularly known as “premiums”.
LET US SUM UP
Insurance is a means of protection from financial loss. It is a form of risk
management, primarily used to hedge against the risk of a contingent or
uncertain loss. An entity which provides insurance is known as an
insurer, an insurance company, an insurance carrier or an underwriter.
CHECK YOUR PROGRESS
1. Which insurance company started its first operation in which year

India got independence?
a) GIC b) LIC
c) OICL d) UIICL
2. Which of the company was parent company of new India
Assurance?
a) LIC b) GIC
c) Oriental Insurance Co Ltd d) United India insurance
10
3. L.I.C. Act was passed in_____
a) July 1956 b) June 1956
c) January 1956 d) September 1956
4. ______ promotes financial stability in economy by insuring the risks
and losses of individuals, firm and organizations.
a) Insurer b) Insured
c) GIC d) LIC
GLOSSARY
Insurance : Insurance is the contract between insured and the

insurer
General : Insurance contracts that do not come under the

insurance ambit of life insurance are called general
insurance.
Life insurance : insurance that pays out a sum of money either on

the death of the insured person or after a set
period:
IRDA : To Protect the interests of the policyholders, to

regulate, promote and ensure orderly growth of the
insurance industry and for matters connected
therewith or incidental thereto."
Insurance : Insurance education could be imparted in India

education and to approach local Universities with the
proposal to include insurance subjects in the
University syllabus.
Insurance in : Insurance companies lead to economic

economic development by mobilizing savings and investing
development them into productive activities. Indian
insurance companies are able to mobilize long-
term savings
SUGGESTED READINGS
1. Dr. Avtar Singh: Law of Insurance, Universal Publication Pvt.
Limited
2. George E. Rejda: Principles of Risk Management and Insurance
3. M. N. Srinivasan: Principles of Insurance Law, Wadhwa & Co.
11
4. Rajiv Jain: Insurance Law and Practice, Vidhi Publication Private
Limited
WEB RESOURCES
1. What is Business Insurance ||Types of Business Insurance||What
is the Main Purpose of insurance - Bing video
2. RISK MANAGEMENT AND INSURANCE LESSON 1 - Bing
video
3. Business and Finance Lesson 10: Insurance (Learn English) -
YouTube
1. c) 2. b) 3. a) 4 a)
12
UNIT 2
TYPES OF INSURANCE
STRUCTURE
Overview
Learning Objectives
2.1 Introduction
2.2 Types of Insurance
2.2.1 Life Insurance

2.2.2. General Insurance
2.3 Features of Insurance
2.4 Functions of Insurance
2.4.1 Primary functions of insurance
2.4.2. Secondary functions of insurance
2.4.3. Other functions of insurance
2.5 Importance of Insurance Industry
2.6 Role of insurance in economic development of India
2.6.1 Saving and insurance
2.6.2 Capital formation and insurance
2.6.3 Obligation to rural and social sector
2.6.4 Insurance as financial intermediary

2.6.5 Promotes trade and commerce
2.6.6 Facilitates efficient capital allocation
2.6.7 Encouraging financial stability and reduced anxiety

2.6.8 Reducing burden government exchequer
2.7 Benefits of Insurance
Let us sum up
Check your progress
Glossary
Suggested readings
13
OVERVIEW
In this unit, you are going to learn about concept of insurance and what
are the types of life insurance, importance of insurance, functions of
insurance, information about life insurance etc,
LEARNING OBJECTIVES
• discuss the various types of insurance
• point out the features and functions of insurance
• describe importance of insurance
• explain the role of insurance in economic development of India
• explore the benefits derived from insurance policy.
2.1 INTRODUCTION
It is a contract in which the insurance company undertakes to indemnify
the insured on the happening of certain event for a payment of
consideration. It is a contract between the insurer and insured under
which the insurer undertakes to compensate the insured for the loss
arising from the risk insured against.
2.2 TYPES OF INSURANCE
There are two broad categories of insurance:

1. Life Insurance
2. General insurance
2.2.1 Life Insurance
Life insurance (or) life assurance, especially in the Commonwealth of
Nations) is a contract between an insurance policy holder and an insurer
or assurer, where the insurer promises to pay a designated beneficiary a
sum of money (the benefit) in exchange for a premium, upon the death
of an insured person (often the policy holder). Depending on the
contract, other events such as terminal illness or critical illness can also
trigger payment. The policy holder typically pays a premium, either
regularly or as one lump sum. Other expenses, such as funeral
expenses, can also be included in the benefits.
Life policies are legal contracts and the terms of the contract describe
the limitations of the insured events. Specific exclusions are often written
into the contract to limit the liability of the insurer; common examples are
claims relating to suicide, fraud, war, riot, and civil commotion.
14
Difficulties may arise where an event is not clearly defined, for example:
the insured knowingly incurred a risk by consenting to an experimental
medical procedure or medication resulting in injury or death.
Modern life insurance bears some similarity to the asset
management industry[1] and life insurers have diversified their products
into retirement products such as annuities.[2]
Life-based contracts tend to fall into two major categories:
• Protection policies: designed to provide a benefit, typically a
lump sum payment, in the event of a specified occurrence. A
common form—more common in years past—of a protection
policy design is term insurance.
• Investment policies: the main objective of these policies is to
facilitate the growth of capital by regular or single premiums.
Common forms (in the U.S.) are whole life, universal life,
and variable life policies.
a) Term Insurance: Term Insurance is the simplest form of life
insurance. It pays only if death occurs during the term of the policy,
which is usually from one to 30 years. Most term policies have no
other benefit provisions. Thus, the features of Term Insurance Plan
are as follows: ¾ It is a pure life cover i.e. in the event of death of
the insured the sum assured is paid to the family (beneficiaries). ¾
in case the insured survives the policy term, there is no return of
premium. ¾ There is no investment component in a term plan
Example Mr. X took a term insurance plan from ABC Life Insurance
Co. Ltd. for a period of 20 years and sum assured of Rs.10 lacs. In
the event of his death, Rs.10 lacs would be paid to Mrs. X. If Mr. X
survives the term, there will be no return of premium.
b) Whole Life Insurance: Under this policy premiums are paid
throughout life and the sum insured becomes payable only at the
death of the insured. The policy remains in force throughout the life
of the assured and he continues to pay the premium till his death.
This is the cheapest policy as the premium is to be paid till the death
of the Insured. This is the cheapest policy as the premium charged
is the lowest under this policy. This is also known as ‘ordinary life
policy’. This policy is suitable to persons who want to make
bequeathments for charitable purposes and to provide for their
families after their death.
c) Endowment Plans: An endowment policy is a saving linked
Insurance policy with a specific maturity date. Under this policy the
sum assured becomes payable if the assured reaches a particular
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age or after the expiry of a fixed period called the endowment period
or at the death of the assured whichever is earlier. The premium
under this policy is to be paid up to the maturity of the policy i.e. the
time when the policy becomes payable. Premium would be little
higher in case of this policy than the whole life policy. This is a very
popular policy these days as it serves the dual purpose securing the
family and /or saving for the retirement.
d) Children Policies: These types of policies are taken on the life of
the parent/children for the benefit of the child. By such policy the
parent can plan to get funds when the child attains various stages in
life. Some Insurers offer waiver of premium in case of unfortunate
death of the parent/proposer during the term of the policy.
e) Annuity/ Pension Plans: When an employee retires, he no longer
gets his salary while his need for a regular income continues.
Retirement benefits like Provident Fund and gratuity are paid in
lump sum which are often spent too quickly or not invested
prudently with the result that the employee finds himself without
regular income in his post - retirement days. Pension is therefore an
ideal method of retirement provision because the benefit is in the
form of regular income. It is wise to provide for old age, when we
have regular income during our earning period to take care of rainy
days. Financial independence during old age is a must for
everybody. This issue of having regular income during old age is
taken care off by Annuity Policies. It is a policy under which the
insured amount is payable to the assured by monthly or annual
instalments after he attains a certain age. The assured may pay the
premium regularly over a certain period or he may pay the premium
regularly over a certain period or he may a lump sum of money at
the outset. These policies are useful to persons who wish to provide
a regular income for themselves and their dependents.
f) Money Back Policies: Money Back Plan is a special type of Life
Insurance Policy. Under this policy the money comes back to the
Life Insured after specified intervals of time as Survival Benefits.
However, if the Life insured dies during the term of the policy, then
the death benefit will be paid to the nominee and the policy would be
terminated and no further money would be paid to him at regular
intervals. Thus, a money back policy is an endowment policy with
liquidity benefit. The maturity benefit comes in instalments instead of
Lump Sum at the end of the term of the policy. These benefits
received at regular intervals are called Survival Benefits. Each
installment is a percentage of sum assured. The remaining bit
16
comes from maturity benefit at the end of the term of the policy.
Illustration Bhakt Sethi has opted for a Money Back Life Insurance
Policy. His plan has a Sum Assured of 5 lakhs for a policy term of 25
years. He would need to pay premiums for 25 years. And he would
get back a part of the Sum Assured at regular intervals. For
example, for a policy of 25 years, he would get 15% of Sum Assured
after the 5th, 10th, 15th and 20th year of the policy i.e. he gets 15 X
4 = 60% of the Sum Assured as Survival Benefit. On Maturity of the
policy, he would get the remaining 40% of the Sum assured.
g) Group Insurance- Group insurance refers to the life insurance
protection to group of persons. Opting for group insurance provides
the advantage of a standardized cover to the group at competitive
rates. They are suitable for large part of population who cannot
afford individual life cover. Further members of an eligible group
who otherwise cannot be insured can benefit through group
insurance. Once the conditions of group insurance are satisfied,
members can get life insurance at significantly lower rates
compared to individual policies. The group may consist of
employees, doctors, lawyers, credit societies etc. A group insurance
scheme can be either
• Contributory scheme – In this case the premium on the
group life insurance policy is paid by both the employer
and the employee.
• Non-Contributory scheme – In this case premium is paid
by the employer or the main agency fully.
f) Unit Linked Insurance Plan: Unit linked insurance plans (ULIPs)
aim to serve both the Protection and investment objectives of
investing. ULIP’s are subject to capital market risks.
2.2.1 General Insurance
Everything apart from life can be insured under general insurance. It
offers financial compensation on any loss other than death. General
insurance covers the loss or damages caused to all the assets and
liabilities. The insurance company promises to pay the assured sum to
cover the loss related to the vehicle, medical treatments, fire, theft, or
even financial problems during travel.
General Insurance can cover almost anything, and everything but the
five key types of insurances available under it are –
• Health Insurance: Covers the cost of medical care.
• Fire Insurance: give coverage for the damages caused to goods
or property due to fire.
17
• Travel Insurance: compensates the financial liabilities arising
out of non-medical or medical emergencies during travel within
the country or abroad
• Motor Insurance: offers financial protection to motor vehicles
from damages due to accidents, fire, theft, or natural calamities.
• Home Insurance: compensates the damage caused to home
due to man-made disasters, natural calamities, or other threats
We are going to see the major general insurance in India.
1. Motor Insurance
Motor Insurance is a very important product, and we should know about
it. Either you or me both are having risk while driving any motor vehicle
on the road. Nobody is 100% safe on the road. However, you can
reduce the risk by safe driving. Our life is full of uncertainties and
accidents can happen anytime. An accident can damage the vehicle at
any level. Apart from accidents there can be any other natural calamities
and theft also. Motor insurance can safeguard us from these sudden
financial losses.
Motor Insurance in India
Motor insurance is a legal contract between Policyholders and insurance

companies. In this contract insurance company promise to pay the
financial compensation for the financial loss/liabilities.
Financial loss or liabilities incurred by the policyholder due to an event
(Man-made or natural) involving the insured’s vehicle. It means it
protects you from the financial loss associated with your motor vehicle.
Motor insurance is mandatory in India. Without having your vehicle
insurance, you can’t drive it on the road. Therefore, motor insurance is
for legal requirements and for financial protection as well. Compensation
will totally depend on the types of coverage and policy you have.
Types of Motor Insurance Policy
There are following types of motor insurance in India.
1. Third-Party Insurance: This insurance policy covers the loss or

damage to the third party only. In summary, It includes bodily
injury, death and property damage of a third party. This is the
basic and minimum insurance protection available. It is also
called liability only policy also.
2. Comprehensive Insurance: This insurance policy is the next
version of third-party insurance. It covers third-party and first
18
party both. It provides the coverage of damage or theft of the
insured’s vehicle, personal accident and third-party liability.
3. Standalone Own damage: This policy provides coverage for its
own damage section of the vehicle. Standalone OD policy is
available for those private cars and two-wheeler which are
purchased after 1 September 2018.
2. Fire Insurance
Fire insurance pays or compensates for the damages caused to your
property or goods due to fire. It covers the replacement, reconstruction
or repair expenses of the insured property as well as the surrounding
structures. It also covers the damages caused to a third-party property
due to fire. In addition to these, it takes care of the expenses of those
whose livelihood has been affected due to fire.
3. Health Insurance
Health insurance refers to a type of general insurance, which provides
financial assistance to policyholders when they are admitted to hospitals
for treatment. Additionally, some plans also cover the cost of treatment
undertaken at home, prior to a hospitalization or after discharge from the
same. With the rising medical inflation in India, buying health insurance
has become a necessity. However, before proceeding with your
purchase, consider the various types of health insurance plans available
in India.
4. Marine Insurance
It is contract by which underwriters engage to indemnify the owner of a
ship, cargo or fright against losses from certain perils or sea risks to
which their ship or cargo may be exposed. In case of marine insurance
another type of insurance is prevalent known as Mutual Insurance.
2.3 FEATURES OF INSURANCE
The decision whether to buy an insurance policy now or later always
confuses the people because at one hand you have to pay a premium
which is an expense and on the other hand you have the benefit of your
loss getting covered by insurance company in the event of any
contingency. Before deciding whether to take insurance or not one
should know the features of insurance, given below are some of the
features of insurance –
19
1) Insurance (excluding life insurance which tends to pay after
certain period of time) is not an investment rather it is a
hedge against the future probable losses.
2) It gives you the comfort that in the event of any loss from
unforeseen events will be compensated by the insurance
companies.
3) One has to pay premiums regularly to the companies
providing insurance in order to enjoy the benefits of
insurance.
4) It can be of many types like life insurance, fire, marine,
health insurance and so on and one can take any of the
above polices depending on the risk with which an individual
is exposed to.
5) Insurance policies can be modified and offered to people
depending on their risk profile and the need of the insurer.
6) There is a limit to the amount by which an insurance
company will compensate for the loss incurred by the
insurer. The amount is mentioned in the insurance policy
and the more the amount of insurance cover the more will be
the premium which one has to pay to the company.
7) A person can take more than one policy, in other words
there are no restrictions on the number of policies which one
can take.
2.4 FUNCTIONS OF INSURANCE
2.4.1. Primary functions of insurance
a) Providing protection — The elementary purpose of insurance is
to allow security against future risk, accidents and uncertainty.
Insurance cannot arrest the risk from taking place but can for sure
allow for the losses arising with the risk. Insurance is in reality a
protective cover against economic loss, by apportioning the risk
with others.
b) Collective risk bearing — Insurance is an instrument to share the
financial loss. It is a medium through which few losses are divided
among larger number of people. All the insured add the premiums
towards a fund and out of which the persons facing a specific risk
is paid.
c) Evaluating risk — Insurance fixes the likely volume of risk by
assessing diverse factors that give rise to risk. Risk is the basis for
ascertaining the premium rate as well. Provide Certainty —
Insurance is a device, which assists in changing uncertainty to
certainty.
20
2.4.2. Secondary functions of insurance
a) Preventing losses — Insurance warns individuals and
businessmen to embrace appropriate device to prevent
unfortunate aftermaths of risk by observing safety instructions,
installation of automatic sparkler or alarm systems, etc. '
b) Covering larger risks with small capital — Insurance
assuages the businessmen from security investments. This is
done by paying small amount of premium against larger risks and
dubiety.
c) Helps in the development of larger industries — Insurance
provides an opportunity to develop to those larger industries
which have more risks in their setting up.
2.4.3. Other functions of insurance
1. Is a savings and investment tool — Insurance is the best
savings and investment option, restricting unnecessary expenses
by the insured. Also, to take the benefit of income tax exemptions,
people take up insurance as a good investment option.
2. Medium of earning foreign exchange — Being an international
business, any country can earn foreign exchange by way of issue
of marine insurance policies and a different other way.
3. Risk Free trade — Insurance boosts exports insurance, making
foreign trade risk free with the help of different types of policies
under marine insurance cover. Insurance provides indemnity, or
reimbursement, in the event of an unanticipated loss or disaster.
2.5 IMPORTANCE OF INSURANCE INDUSTRY
I. Individual aspects:
1. Security for health and property
2. Encourage savings
3. Encourage the habit of forced thrift
4. Provide mental peace
5. Increase efficiency
6. Provision for the future
7. Awareness for the future
8. Credit Facility
9. Tax exemption
10. Contribution to the conservation of health
11. Cover for legal liability
12. Security to the mortgaged property
13. Poster economic independence
21
II Economic aspects
1. Safety against risk
2. Protection to employees
3. Basis of Credit
4. Protection from the loss of key man
5. Encourage loss prevention methods
6. Reduction of cost
7. Promote foreign trade
8. Development of big industries
9. Increase in efficiency
III Social aspects
1. Stability in family life
2. Development of employment opportunity
3. Encourage alertness
4. Contributes to the development of basic facilities
IV National aspects
1. Increase the national savings
2. Helps in development opportunities
3. Develops the money market
4. Earns foreign exchange
5. Capitalizes the savings
Need of Insurance
Life of everyone is full uncertainties. Nobody knows what is going to
happen in next moment. This element of unknown situation always
hounds around the mind of a person and keeps him worried to think as
to what will happen in future in case of any mishappening. This worry is
to think about the future of the person and his family. Among a number
of worries the main and very important is economic uncertainty of
himself or his family.
If anyone is satisfied with his present earnings, he also thinks whether or
not his present-day capacity of earning will last for long. Perhaps there
remains an iota of fear that it may not last for the long. On this very point
everyone thinks about to secure his future.
Under the impression of securing future, one thinks about the adoption
of saving and investment plans. He not only thinks about himself but
also about his family. In case of any miss happening, everyone is
worried as to what shall happen to his family.
Everyone knows that there is no substitute in case of death of an
earning member of the family and no compensation is able to fulfil the
22
gap in case of death of the earning member. But for supporting
economically upto some extant the method adopted is known as
insurance.
The life insurance is such a cover that provides security to the family of
insured in case of his death. Life Insurance in such cases provides some
solutions to the worries of family members.
Once upon a time it was very difficult to convince people for getting an
insurance cover but today it has become a need of the day. Today the
life insurance does not cover the risk of life only but also provides many
added benefits also in the field of saving and investments.
People need insurance because the unexpected does happen. Whether
it is a fire, a car wreck, illness or a death, the financial consequences
can be devastating if you are uninsured. Insurance helps people have
peace of mind when life’s unexpected events happen.
2.6 ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT OF
INDIA
2.6.1. Saving and Insurance
Saving involves refraining from present consumption. The investment
can take place only when there are savings. The relationship between.
saving, investment and growth of GDP can be explained as:
G = S / K. Where G – Rate of GDP growth, S – Saving Ratio and K –
Capital output ratio.
Insurance companies lead to economic development by mobilizing
savings and investing them into productive activities. Indian insurance
companies are able to mobilize long-term savings to support
economic growth and also facilitate economic development by providing
insurance cover to a large segment of our people as well as to business
enterprise throughout India.
2.6.2. Capital Formation and Insurance
Capital formation maybe defined as increase in capital stock of the
country consisting of plant, equipment, machinery, tools, building, means
of transport, communication, etc. The process of capital formation
envisages three essential steps. These are:
Real saving: Mobilization of saving through financial and non-financial
intermediaries to be placed at the disposal of investor.
The act of investment: The contribution of insurance companies in the
process of capital formation appears at all these stages. Insurance
23
services act as a tool to mobilize saving, function as financial
intermediary and at times also indulge in direct investment. Also govt.
has made regulations under which every insurer carrying on business of
life insurance shall invest 25% of funds in Govt. securities and not less
than 15% in infrastructure and social sector.
The importance of Indian insurance industry is gauged by the fact that
annual amount of investible funds of LIC and GIC and its subsidiaries
amounted to over Rs. 20,000 crore and Rs. 10,000 crore are invested in
nation building activities, housing and other infrastructural areas.
Increased Employment: Prior to the liberalization of insurance sector in
India, the opportunities for employment were limited with the LIC of India
as sole employer. While some of the professionals left the country
looking for opportunities elsewhere, those who remained, worked within
the confines and constraints of public sector monopoly. This has further
constrained the opportunities for exposure to the development in rest of
the world. Liberalization and the opening up of sector to private players
has now created a vast opportunity for employment.
2.6.3 Obligation to Rural and Social Sector
In India, the insurance companies are required to fulfill their obligation

towards rural and social sector. For this, Life insurers are required to
have 5%, 7%, 10%, 12%, 15% of total policies in first five years
respectively in rural sector. Likewise General Insurers are required to
have 2% 3% and 5% thereafter of total gross premium income written in
first five financial years respectively in rural sector.
2.6 4. Insurance as financial intermediary
Financial intermediaries perform the function of channelizing saving into
domestic investment. They facilitate efficient allocation of capital
resources, which in turn improve productivity and economic efficiency
which result in reduced capital output ratio. The insurance companies
perform extremely useful function in economy as financial
intermediaries. These are as follows:
a) Reduction in transaction cost: Insurers help in reducing
transaction cost in economy by collecting funds from
policyholders and investing the same in different projects
scattered over different regions. It is a specialized and time-
consuming job.
b) Creating liability: The policyholders, in case of loss, are not
required to wait for a long period for the amount of claim. It
improves their liquidity.
24
c) Facilitates Economies of scale in Investment: Insurers are in
the position of financing large projects, railways power projects,
etc. These large projects create economies of scale, facilitate
technological innovation and specialization and thus promote
economic efficiency and productivity.
2.6.5. Promotes Trade and Commerce
The increase in GDP is positively correlated to growth of trade and
commerce in economy. Whether it is production of goods and services,
domestic or international trade or venture capital projects, insurance
dominates everywhere. Even banks demand insurance cover of assets
while granting loans for purchase of assets. Thus insurance covers,
promotes specialization and flexibility in the economic system that play
contributory role in healthy and smooth growth of trade and commerce.
2.6.6. Facilitates efficient capital allocation
Insurance provides cover to large number of firms, enterprises and
businesses and also deploy their funds in number of investment
projects. The vast pool of knowledge and expertise so gained enable
them to distinguish between productive and high return projects.
Therefore, they promote efficient and productive allocation of capital
resources, which in turn lead to increased productivity and efficiency in
the system.
2.6.7. Encouraging Financial Stability and Reducing Anxiety

Insurer promotes financial stability in economy by insuring the risks and
losses of individuals, firm and organizations. Because of uninsured large
losses, firm may not be able to compensate for it leading to its
insolvency which may cause loss of employment, revenue to supplier &
Govt., loss of products to customer, etc. Moreover, it relieves the
tensions and anxiety of individuals by securing the loss of their lives and
assets.
2.6.8. Reducing Burden on Govt. Exchequer
Insurance companies, particularly life insurers provide a variety of

insurance products covering needs of children, women and aged etc
under social security network and thereby reduce the burden on Govt.
exchequer in providing these services. This Govt. saves expenditure on
these items and amount can be utilized for more productive projects. To
conclude, we can say that insurance companies play an important role in
economic development of country.
25
2.7 BENEFITS OF INSURANCE
The insurance gives benefits to individuals and organisations in many
ways. Some of the benefits are discussed below:
1) The obvious benefit of insurance is the payment of losses.
2) Manages cash flow uncertainty when paying capacity at the time
of losses is reduced significantly.
3) Complies with legal requirements by meeting contractual and
statutory requirements, also provides evidence of financial
resources.
4) Promotes risk control activity by providing incentives to
implement a program of losing control because of policy
requirements.
5) The efficient use of the insured’s resources. It provides a source
of investment funds. Insurers collect the premiums and invest
those in a variety of investment vehicles.
6) Insurance is support for the insured’s credit. It facilitates loans to
organisations and individuals by guaranteeing the lender
payment at the time when collateral for the loan is destroyed by
an insured event. Hence, reducing the uncertainty of the lender’s
default by the party borrowing funds.
7) It reduces social burden by reducing uncompensated accident
victims and the uncertainty of society.
LET US SUM UP
Insurance is a contract (policy) in which an insurer indemnifies another
against losses from specific contingencies or perils. There are many
types of insurance policies. Life, health, homeowners, and auto are the
most common forms of insurance
CHECK YOUR PROGRESS
1. A legal contract between policy holder and insurance is called
a) Motor insurance b) Whole life insurance
c) Two-wheeler insurance d) Life insurance
2. Which means protection from financial loss?
a) Assurance b) Risk Management
c) Insurance d) None of These
3. Which insurance provides Lifetime coverage for a set of premium
amounts is
a) Whole life insurance b) Permanent life insurance
26
c) Term insurance d) None of the above
4. Payment from the policy may be as a lump sum or as
a) Instalment b) Annuity
c) Insurance d) None of these
5. The main protection need of a 19 year old is most likely to be
a) Home loan protection b) Self protection
c) Protection of dependents d) None of these
GLOSSARY
Premium : Premium refers to a specific amount to be paid
periodically
Exclusion : Cases for which the insurance company does not
provide coverage
Underwriting : The process insurers use to determine the risks of
insuring your small business.
Assurance : Confidence or certainty in one’s own abilities
Policy : Prudent or expedient conduct or action
Contract : Enter into a formal and legally binding agreement
SUGGESTED READINGS
Limited
2. Elements of Insurance by Dr.A. Murthy
4. Insurance companies’ websites
5. Insurance Principles and Practice by Mishra - S. Chand
6. IRDAI website
Limited
WEB RESOURCES
1. Financial Risk Management - Summer term 2018 - Lecture 1 -
Bing video
2. Life Insurance study class TYPES OF INSURANCE - Bing video
3. The Basic Types of Insurance Coverage - Bing video
1.a) 2.c) 3.a) 4.b) 5 b)
27
UNIT 3
INSURANCE AND SOCIAL SECURITY

STRUCTURE
Overview
Learning Objectives
3.1 Introduction to Social Security
3.2 Meaning of social Insurance
3.3 Main features of social insurance

3.4 Characteristics of social Insurance
3.5 Social Insurance and Commercial Insurance
3.6 Insurance as a Social Security Tool

3.7 Objectives of Social Security
3.7.1 Security and stability of living
3.7.2 Support to individuals for independence
3.7.3 Support of household functions
3.8 Functions of Social Security
3.8.1 Social safety device (social safety net)

3.8.2 Redistribution of income
3.8.3 Diversification of risks
3.8.4 Social stability, and economic stability and growth

3.9 Insurance Development and Regulatory Authority (IDRA)
3.10 Functions and duties of IRDA
Let us sum up
Check your progress
Glossary
Suggested readings
28
OVERVIEW
This unit consist of the topics of social security and insurance,
Objectives and functions of social security, and functions and duties of
IRDA.
LEARNING OBJECTIVES
• describe about the insurance is a social security
• divulge about social insurance and its characteristics
• look at the various objectives and functions Social Security
• point out the functions of IRDA.
3.1 INTRODUCTION TO SOCIAL SECURITY
Social security is used for Old-Age, Survivors, and Disability Insurance
(OASDI) run by a federal agency in the United States of America known
as the Social Security Administration (SSA). This is a lump sum payment
paid to those in need. Either as a retirement benefit, disability payments
or survivor benefits. In simpler terms, social security is a program
designed to support those with little to no income.
The two important types of social security are as follows: 1. Social
Assistance 2. Social Insurance.
1. Social Assistance
Social assistance refers to the assistance rendered by the Government
to the needy persons without asking them to make contributions to be
entitled to get such assistance. In other words, social assistance
includes those benefits which are provided by the Government without
any contribution from workers and employers. Workmen’s
compensation, maternity benefits, old age pensions, etc. are the
examples of social assistance.
2. Social Insurance
Social insurance refers to a scheme of maintaining fund from the
contributions made by the employees and employer, with or without a
subsidy from the Government. In other words, social insurance can be
defined as a device to provide benefits as of right for persons of small
earnings; in amounts which combine the contributively efforts of the
insured with subsidies from the employer and the Government Examples
of social insurance are provident fund and group insurance.
29
3.2 MEANING OF SOCIAL INSURANCE
Social insurance is one of the devices to prevent an individual from
falling to the depths of poverty and misery and to help him in times of
emergencies. Insurance involves the setting aside of sums of money in
order to provide compensation against loss, resulting from particular
emergencies.
The elimination of the risk of the individual is the basic idea of insurance.
It is primarily the effort of the social group, in place of the individual
effort, to lessen the incidence of loss on the individual.
We may define social insurance as “a co-operative device, which aims at
granting adequate benefits to the insured on the compulsory basis, in
times of unemployment, sickness and other emergencies, with a view to
ensure a minimum standard of living, out of a fund created out of the
tripartite contributions of the workers, employers and the State, and
without any means test, and as a matter of right of the insured”.
In the words of Sir William Beveridge, “social insurance can be

described as the giving in return for contribution, benefits upto
subsistence level, as right and without means tests, so that individual
may build freely upon it.”
3.3 MAIN FEATURES OF SOCIAL INSURANCE
We can, point out certain well-marked features of social insurance:
1) It involves the establishment of a common monetary fund out of
which all the benefits in cash or kind are paid, and which is
generally built up of the contribution of the workers, employers and
the State.
2) The contribution of the workers is merely nominal and is kept at a
low level so as not to exceed their paying capacity, whereas the
employers and the State provide the major portion of the finances.
This means that there is no close correspondence between
workers’ own contribution, and the benefits granted to them.
3) Benefits are granted as a matter of right and without any means
test, so as not to touch the beneficiaries’ sense of self-respect.
4) Social insurance is now provided on a compulsory basis so that its
benefits might reach all the needy persons of the society who are
sought to be covered.
5) The benefits are kept within fixed limits, so as to ensure the
maintenance of a minimum standard of living of the beneficiaries
during the period of partial or total loss of income.
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6) It has to be borne in mind that social insurance alleviates the
sufferings of the individual from the particular event, but, it does
not prevent it. As a matter of fact, when prevention is impossible,
or nearly so, that insurance has its greatest appeal.
3.4 CHARACTERISTICS OF SOCIAL INSURANCE
1) A common fund is established by employer, State and the workers
out of which all the benefits in cash or kind are paid.
2) The contribution of the workers is nominal which generally does
not exceed their paying capacity, whereas the employers and the
State provide the major portion of the finances.
3) The object of the benefits is to ensure the maintenance of a
minimum standard of living to the beneficiaries during the period of
partial or total loss of income.
4) Benefits are granted as a matter of right and without any means
test, thus, they do not touch the self-respect of the beneficiaries.
5) It is provided on compulsory basis so that its benefit might reach to
all the needy persons of the society who are sought to be covered
by the scheme.
6) Lastly, social insurance reduces the sufferings arising out of the
contingencies faced by individual contingencies which he cannot
prevent.
3.5 SOCIAL INSURANCE AND COMMERCIAL INSURANCE:
Commercial insurance is necessarily voluntary, whereas social
insurance is generally compulsory. In commercial insurance, the policy
benefits are according to the premiums paid, while in social insurance
the benefits received by the workers are much larger than their
contributions.
Moreover, commercial insurances do not have for its object the
maintenance of a minimum standard of living, which is the only inspiring
motive of social insurance. Besides, social insurance is undertaken to
meet a chain of contingencies of diverse nature and intensity, while
commercial insurance provides against an individual risk only.
Social insurance is different from commercial insurance, for the latter is
voluntary and is meant for the better-paid sections of the society, and its
benefits are in proportion to the premium paid; it offers protection only
against individual risks and does not aim at providing a minimum
standard of living.
Thus, commercial insurance is voluntary whereas social insurance is
compulsory. In commercial insurance the benefits are given according to
the premium paid just as the risks are covered under LIC policies, while
31
in social insurance the benefits received by the workers are much larger
than their contribution. Moreover, social insurance has the object of
maintaining a minimum standard of living while in commercial insurance
the object is to cover the risk of those individuals who pay the premium.
It is, thus, obvious that, the ideals of social insurance are based on
human dignity and social justice while that of commercial insurance are
on means tests. Besides, social insurance is undertaken to meet a chain
of contingencies of diverse nature and intensity, while commercial
insurance provides security against an individual’s risk.
3.6 INSURANCE AS A SOCIAL SECURITY TOOL
• United Nations Declaration of Human Rights 1948 provides: -”
Everyone has a right to adequate standard of living for health and
wellbeing of himself and his family, including food, clothing,
housing, medical care, necessary social services and the right to
security in the event of unemployment, sickness, disability,
widowhood, or other lack of livelihood in circumstances beyond his
control.”
• Under a socialistic system the responsibility of full security would
be placed upon the state to find resources for providing social
security. In the capitalistic left to the individuals. The society
provides instruments which can be used in securing this aim.
Insurance is one of aim. In capitalistic society too there is a
tendency to provide some social security by the state under some
schemes where members are required to contribute.
• In India, Article 41 of our Constitution requires the State (within
limits of its economic capacity and development) to make effective
provision for securing the right to work, to education and to provide
public assistance in case of unemployment, old age, sickness and
disablement.
• Part of the obligations under Article 41 are met by the State
through the mechanism of Life Insurance.
• Where breadwinner of family dies, family’s income stops to that
extent, affecting the economic condition. Life Insurance provides
such alternate arrangement as we have discussed above.
Otherwise another family would have been pushed into the lower
strata of society. The lower strata creates a cost on society. Poor
people cost the nation by way of subsidies etc.
• Life insurance helps in restoration of the adverse economic
condition so caused.
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• Some of the legislation passed by the Govt. of India to protect the
rights and to provide benefits to the common man as a part of its
efforts to provide social security to its dominions is discussed in
brief below:
3.7 OBJECTIVES OF SOCIAL SECURITY
3.7.1 Security and stability of living
The present objective of social security is to ensure the entire citizens
sound and anxiety-free lives through implementing social security
systems to help them in case of instability of living and to prevent such
instability.
In the period immediately after World War II, the main objective of social
security was to give relief for the needy and to prevent poverty, as
shown in the recommendations made by the Advisory Council on Social
Security in 1950. The objective was based on the concept stated in the
Constitution of Japan (“All people shall have the right to maintain the
minimum standards of wholesome and cultured living”). The public
assistance system fulfilled the function of relief for the needy, and the
social insurance system represented the function of preventing poverty.
Also, in the recommendations made by the Advisory Council in 1962,
mainly concerning relief for the needy and prevention of poverty, plans
on social security systems were made targeting each of social groups
classified into the needy, low-income class, and general- income class.
Presently, however, the social security objective has exceeded the
range of relief for the needy and prevention of poverty, and is changing
to wider security of national life. In accordance with the elevation of the
living standard, the benefit levels ensured by the social security systems
have also exceeded the levels for ensuring the minimum level of living,
which was the level to be attained in the relief for the needy and
prevention of poverty. For example, the social welfare services including
the welfare services for the elderly and the public pensions provided in
proportion to the pre-retirement income are not just for preventing
poverty. They are provided to improve the living quality; to support
independence; and to compensate for the lack of earning ability after
retirement.
The “life with a minimum standard of health and culture” ensured under
the public assistance system does not simply mean a living for
existence. It means to lead a respectable life as a human being. The
minimum level of living ensured under the system is not therefore fixed
and will be changed and improved in relation to social and economic
33
situations, to the living standard of the citizens and to the social
background.
Social security, however, does not ensure people the minimum level of
living without condition. In the society of free economy, it is basically
each one’s responsibility of self-help effort to maintain and manage
his/her life. In preparation against unforeseen events to which an
individual citizen cannot easily deal with for himself/herself, social
security ensures ways of living towards a stable life through systems
established based on the idea of social solidarity.
3.7.2 Support to individuals for independence
“Independence” generally means to lead an independent life without
receiving supports or controls by others, to lead an independent life
without relying on others’ help despite physical disabilities, or to lead a
mentally independent life even physically needing others’ help.
Although it is basically required for each one to lead an independent life
for himself/herself, unforeseen events such as illness and accidents,
corporate bankruptcy, or physical weakness in his/her old age may
hinder the maintenance of independent living. Besides there are some
people who cannot live independently and need others’ help because of
disabilities by nature. One of the social security objectives is to support
people suffering from such events or disabilities to lead respectable lives
in independent manners according to their own lifestyles in family and
region, regardless of disability or age. By implementing measures to
support people in difficulties to lead independent lives, the social security
systems enable such people to live and take actions on their own
responsibility and judgement and provide them with possibilities to step
into the new stages of their lives.
Support for independence is an idea that has been traditionally existing
in the welfare field. For example, the public assistance system aims at
ensuring the minimum level of living to all the needy, and at promoting
their independence. Here independence does not simply mean “not to
receive public assistance” but also “to display one’s ability and to lead a
social life appropriately based on the ability.” In the welfare system for
people with disabilities, the support for their independence has been one
of the objectives, and multiple measures have been promoted to
improve the welfare services and income security including the
implementation of education, sheltered work programs and job training.
In the recent years, in accordance with the popularization of the idea of
normalization, the importance of support for independence has been
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further emphasized for people having some kinds of handicaps, not
limited to those with disabilities.
Also, in the examination of new social security systems, greater
importance is placed to the idea of support for independence. In the
creation of the long-term care insurance system, the “independence of
the elderly” is proposed as one of the basic principles for the care of the
elderly and is incorporated in Article 2 of the Long-term Care Insurance
Law. Here support for independence means to give support for the
elderly to lead high-quality lives based on their own wills even when they
need some cares. Also, in the revision of the Child Welfare Law in 1997,
the names and functions of child welfare facilities were reviewed based
on the basic principle of support to children for independence. Here
support for independence means to support children in need of
protection so that they can develop their personalities and live vigorously
as independent members of society, in addition to protect them in the
facilities.
3.7.3 Support of household functions
Some of the social security systems are taking over the functions that
have been privately fulfilled by each household including the care of
children in need of such care, care of persons (children) with disabilities,
rearing children and giving support to aged parents. Outsourcing under
the social security systems of such functions has become necessary for
the following reasons. The traditional household infrastructure has been
weakened due to the increase in the number of nuclear families and to
the downsizing of family scales; the living environment and people’s
values on living have been changing; and the average life span of
Japanese people has been prolonged. Because of these, some of the
household functions can no longer be privately met and need to be
supported by the society.
Giving necessary support to families suffering from diversified problems
through social systems will prevent the breakup of family lives and will
lead to the stabilization of living and intensification of psychological links
among family members. Under certain household environments, the
rights of children to grow sound and healthy or the rights of people in
need of care might be endangered. In such cases, by giving support to
the families through social security systems, the rights of the children or
of the people needing care will be protected. Furthermore, in addition to
giving support for household functions, the improved childcare services
or long-term care services will enable both men and women to work
while rearing children or taking care of their family members. As a result,
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the services will contribute to Japan’s economic growth through the
promotion of a society in which both men and women can equally
participate and through the expansion of labour power.
3.8 FUNCTIONS OF SOCIAL SECURITY
Next, social security has the following four functions, and there are a lot
of overlaps among the functions. They are a) function as a social safety
device (social safety net); b) redistribution of income; c) diversification of
risks; and d) social stability and economic stability and growth.
3.8.1 Social safety device (social safety net)
Social security functions as a social security device (social safety net) for
ensuring stable and anxiety-free lives in preparation against difficulties
that might endanger the stability of living such as illness, injury, need for
care, unemployment, retirement without means to earn money, and
unforeseen accidents.
For example, in case of illness or injury, you can easily receive medical
services with the medical expenses paid by medical insurance. Even if
you retire from your work and have lost the means to earn money
yourself, you can receive old-age pensions to lead a stable life. Besides
for the needy who cannot be supported by other social security systems,
the public assistance system ensures them the minimum level of living.
Thanks to the social safety net provided by social security, each one can
lead a vivacious, challenging and attractive life without fearing risks,
which eventually leads to the activation of the entire society. Inversely, if
the social safety net becomes unstable, people will feel uneasy and
many of them will, for example, restrain consumption and save money in
preparation against the future anxieties. This will badly affect the
economy and the society will be less active.
When we consider the function of Social Security as ‘Social Safety Net’,
the level of and method for providing the social safety net should be
appropriately determined. As mentioned in 1(1), the benefit level of
social security has already exceeded the level of simply preventing
poverty.
Besides the safety net should not be a single net: it needs to be formed
in multiple layers to prepare against different situations. For example,
the mechanisms, financial resources, and security levels should be
different for each of the medical safety net against illness and injury,
safety net for income security in people’s old age, and safety net for
long-term care of people needing such care. Thanks to the existence of
36
the multiple-layered social safety nets comprising of social insurance
such as medical and pension insurance and of social welfare including
welfare for children, the elderly, and for people with disabilities, people
can lead their daily lives without worries. Among the social security
systems, the public assistance system gives protection and ensures the
minimum level of living to all the needy who cannot be supported by
other social security systems according to their needs. The public
assistance system can be said the “last resort” and the “last safety net”
for people.
3.8.2 Redistribution of income
Under the free economy in which individuals and companies are
engaged in economic activities basically at their discretion, each person
basically earns income as rewards for his/her production activities. The
income levels differ by person, reflecting his/her ability, efforts, positions,
etc. The trends of the market economy, however, may not always result
in the fair distribution of income to which everyone can be satisfied with.
For example, the labor market is more restricted for people with
disabilities and for the elderly than for general workers, and the wage
levels are generally lower. For a family with a parent and an infant, the
income may be low due to the restrictions on the working hours. If a
worker gets ill or injured by an accident and can no longer work, he/she
will lose the means to earn money. Besides due to the inheritance
system, there are differences in people’s assets regardless of their
efforts.
Redistribution of income is an effective measure to reduce income
differences and to stabilize the lives of the low-income class in the
situations in which the market economy alone cannot ensure social
fairness. For the redistribution, the income is transferred among
individuals and households through the tax system and social security
systems. Specifically, for the redistribution of income between different
income classes, funds are raised from the high-income class to be
transferred to the low-income class, or within the same income class,
money is transferred from people who can earn income to those who no
longer have means to earn income. The redistribution of income
includes the provision of medical or child-care services in kind, in
addition to the transfer of money.
The “safety net” has two meanings. For the first meaning, it represents a
net placed over the floor to prevent injuries. For example, a safety net is
used in a circus to prevent performers standing on the rope placed high
above the earth or trapeze performers from getting injured in the event
37
that they fall to the ground. For the second meaning, it represents a
mechanism or a device to give assistance to people in difficulties or to
prevent people from falling into such difficulties. “Safety net” is often
used for the second meaning, not necessarily limited to the field of social
security.
For example, in the public assistance system, income is redistributed
from the people with high income to people with low income through the
tax system as the financial resources. In the medical insurance system,
income is redistributed from healthy people to unhealthy people and the
main financial resource for the redistribution is the insurance premiums.
Each person also redistributes his/her income to himself/herself in
his/her life cycle: the savings accumulated while he/she has ability to
earn income will be transferred to the living expenses in his/her old age
or in illness. It can be said that the public pension system redistributes
income from the working generations to the older generations, using the
insurance premiums as the financial resources.
3.8.3 Diversification of risks
The basic principle of society is for each one to be independent and to
take action at his/her own risk. There may often happen, however,
unforeseen events that individuals cannot deal with for themselves such
as illness, accidents and unemployment. Social security provides a
mechanism for the entire society to deal with such uncertain risks in
people’s daily lives, and contributes to the diversification of risks by
minimizing the influence exerted by a risk through provision of capitals,
etc. It can be said that social security can fulfil its function as a social
safety net by effectively promoting the diversification of risks and the
redistribution of income.
The representative system that works for the diversification of risks in
the social security systems is the social insurance system. The public
assistance system and the social welfare system also contribute to the
diversification of risks in that public assistance or welfare benefits are
provided to support the lives of people who have fallen into poverty or
are in need of care for some reasons.
3.8.4 Social stability, and economic stability and growth
As shown in (1) to (3) above, social security has the function to stabilize
society and the government by giving a feeling of security to people,
giving support when they actually become difficult to live, or
redistributing income to reduce earning differentials.
38
Besides social security mitigates economic fluctuations for economic
stability and supports the growth of economy. For example, continuous
provision of fixed amounts of money even in the periods of economic
depression as under the public pension system not only stabilizes the
lives of old people but also mitigates economic fluctuations (as built-in
stabilizer) by encouraging consumption based on pensions as financial
resources. Furthermore, the reserve for pensions held under the public
pension system has been utilized as the financial resources for fiscal
investments and loans to fund the improvement of social capitals and
the economic development.
To protect the interest of and secure fair treatment to policyholders Also
on an individual level, social security is economically quite effective. For
example, a substantial medical insurance system frees people from
anxiety about illness and encourages people to see a doctor at an earlier
stage of illness, which will lead to earlier recovery of health. For workers,
such promotion of health will contribute to the maintenance and
improvement of their working abilities, and to the maintenance and
increase of income.
Besides substantial childcare or long-term care programs prevent people

from quitting their jobs for such reasons as for raising their children or
taking care of their families and will encourage people (mostly women)
who have not been able to work because of childcare or care of their
families to work. In terms of employment creation, the fields of health,
medical care and welfare alone provide jobs to more than about 3 million
people, and it is expected the fields will further grow in accordance with
the progress of the aging society, etc. A substantial public pension
system reduces heavy pressures on children to give economic support
to their old parents and contributes to free the elderly from anxieties
about their lives.
6.9 INSURANCE DEVELOPMENT AND REGULATORY AUTHORITY
(IDRA)
Insurance Development and Regulatory Authority (IDRA) has been
formed under the provision on Insurance Development and Regulatory
Authority Act 2010 on 26th January in 2011. Government of Bangladesh
has enacted the Insurance Act 2010 to develop and regulate the
insurance business. IDRA has established for the purpose of supervising
the insurance business and safeguarding the interest of policy holder.
The authority is working for the systematic development and regulation
of insurance industry with a view to implement the ‘The National
Insurance Policy 2014.
39
IDRA, consisting by one Chairman and four Members, some Executive
Directors and Directors carrying the different functions of the authority.
The authority is assigned by the Insurance Development and Regulatory
Authority Act 2010 to control the institution relating to insurance and re-
insurance industry to encourage the development of insurance industry.
Providing registration and certificate of insurer, re-insurer, mediator and
renewal, amendment, removal withheld, or cancellation of such
registration are the mandate of IDRA. Inspection, inquiry and
investigation of insurance institutions, developing new policies,
controlling the fund and investment, maintenance of solvency margin
and determining the proposed premium rate, giving advantage to
insurer, settlement of dispute or claim and providing the procedure for
preparing actuarial reports are the major responsibility of IDRA.
History of IDRA
Founded in middle of the 1940s, IDRA has over 70 years of
manufacturing experience in die-casting machines and auxiliary
equipment. One of the major manufacturers of die-casting machines in
Europe, China and the world, the brand is recognized globally as a
byword for quality and reliability.
IDRA remains committed to the goal of framing and supporting essential
policy and leadership issues for advocacy that will improve educational
excellence and equity for all children. The following are a just few
examples of IDRA’s accomplishments in the area of policy and
leadership in the past 45 years.
Since 1973, IDRA is the only organization that can claim continuous,
uninterrupted involvement in Texas school finance reform.
IDRA’s research in 1994 on school dropouts in Texas led to revisions in
the state’s education law regarding monitoring and preventing school
dropouts.
Dr. José Cárdenas, IDRA founder and director emeritus, and IDRA staff
played a key role helping to guarantee the civil rights of all children
regardless of race, sex and national origin in landmark court cases such
as Rodriguez vs. San Antonio, U.S. vs. Texas, Keys vs. Denver, Lau vs.
Nichols, Doe vs. Plyer, and Rodriguez vs. L.A. USD and Edgewood vs.
Kirby I, II, III and IV.
IDRA has provided leadership in the area of immigrant education
throughout its history.
40
IDRA has been creating leadership development around the issue of the
use of public funds for private schools. IDRA is informing parents and
the general public about the educational, social and economic impact of
negative educational vouchers on families who are minority, poor or
learning English.
3.10 FUNCTIONS AND DUTIES OF IRDA
Section 14 of IRDA Act 1999 lays down the duties and functions of
IRDA:
• It issues the registration certificates to insurance companies and
regulates them.
• It protects the interest of policy holders.
• It provides license to insurance intermediaries such as agents
and brokers after specifying the required qualifications and set
norms/code of conduct for them.
• It promotes and regulates the professional organisations related
with insurance business to promote efficiency in insurance
sector.
• It regulates and supervise the premium rates and terms of
insurance covers.
• It specifies the conditions and manners, according to which the
insurance companies and other intermediaries have to make
their financial reports.
• It regulates the investment of policyholder’s funds by insurance
companies.
• It also ensures the maintenance of solvency margin (company’s
ability to pay out claims) by insurance companies.
The functions of IRDA includes:
• To protect the interest of and secure fair treatment to
policyholders.
• To bring about speedy and orderly growth of the insurance
industry (including annuity and superannuation payments), for the
benefit of the common man, and to provide long term funds for
accelerating growth of the economy.
• To set, promote, monitor and enforce high standards of integrity,
financial soundness, fair dealing and competence of those it
regulates.
• To ensure speedy settlement of genuine claims, to prevent
insurance frauds and other malpractices and put in place
effective grievance redressal machinery.
41
• To promote fairness, transparency and orderly conduct in
financial markets dealing with insurance and build a reliable
management information system to enforce high standards of
financial soundness amongst market players.
• To take action where such standards are inadequate or
ineffectively enforced.
• To bring about optimum amount of self-regulation in day-to-day
working of the industry consistent with the requirements of
prudential regulation.
• To register the companies who runs the insurance business
LET US SUM UP
Social security is the protection that a society provides to individuals and
households to ensure access to health care and to guarantee income
security, particularly in cases of old age, unemployment, sickness,
Invalidity, work injury, maternity or loss of breadwinner.
CHECK YOUR PROGRESS
1) At what age can we start collecting social security benefits
a) 62 b) 60 c) 55 d) 65
2) How much can you earn at age 62 without reducing your social
security benefits
a) $39500 b) $15120 c) $72500 d) $6000
3) Which of the following people cannot retirement benefits
a) American Indians
b) Member of Congress
c) Individual who are currently serving more than 30 continuous
days in jail
d) None of these
4) individuals are eligible to receive full social security retirement
benefits at what age
a) 70
b) 65
c) 62
d) Varies based on the year that you were born
5) People who can’t work due to a physical or mental disabilities that
benefit is called
a) Survivors benefits b) Retirement benefits
c) Disabilities benefits d) None of these
42
GLOSSARY
Social security : The protection that a society provides to
individuals
Ombudsman : An official appointed to investigate individuals’
complaints against a company
Policy holder : Person or group in whose name an insurance
policy is held.
Claims : Formally request or demand; say that one owns
or has earned
Grievance : Real or imagined cause for complaint,
especially unfair treatment
SUGGESTED READINGS
Limited
Limited
5. IRDAI website
8. Insurance companies’ websites
WEB RESOURCES
1. What is Social Insurance? || Insurance Policy - Bing video
2. Social Insurance: America’s Neglected Heritage and Contested
Future - Bing video
3. What is Social Security Disability Insurance? - YouTube
4. Calculating Your Social Security Primary Insurance Amount -
Bing video
1 .a) 2.b) 3.c) 4.d) 5.c)
43
UNIT 4
INDIAN INSURANCE MARKET

STRUCTURE
Overview
Learning Objectives
4.1 Introduction to Reforms of Insurance Sector in India
4.2 Journey of Passing the Amendment Act
4.3 Insurance Regulatory & Development Authority (IRDA)

4.4 Privatisation of Insurance
4.5 Liberalization in Insurance Sector
4.6 Indian Insurance market

4.7 New entrants to Indian Insurance Market
Let us sum up
Check your progress
Glossary
Suggested readings

OVERVIEW
In this unit, we are going to learn about the privatisation and
liberalization in insurance and the new technology adopted in Indian
insurance market. The insurance industry of India has 57 insurance
companies - 24 are in the life insurance business, while 34 are non-life
insurers. Among the life insurers, Life Insurance Corporation (LIC) is the
sole public sector company. There are six public sector insurers in the
non-life insurance segment. In addition to these, there is a sole national
re-insurer, namely General Insurance Corporation of India (GIC Re).
Other stakeholders in the Indian Insurance market include agents
(individual and corporate), brokers, surveyors and third-party
administrators servicing health insurance claims.
LEARNING OBJECTIVES
After completing this unit, you will be able to
• gain knowledge on reforms of insurance sector in India
44
• discuss the concept of privatisation and liberalisation of
insurance sectors
• explain the activities of Indian insurance market
• describe the new entrance in Indian insurance market
4.1 INTRODUCTION TO REFORMS OF INSURANCE SECTOR IN
INDIA
• Insurance sector is one among those sectors which have seen
great growth since independence. Regulation of insurance
business dates back to 1818 with establishment of Oriental
Insurance Company.[1] At that time, the subject matters with which
insurance sector dealt with were really restricted. Now the
spectrum has expanded and various kinds of insurance like fidelity
insurance, crop insurance, etc have added to the list.
• This industry has developed gradually from being a nationalized
industry to allowing involvement of private players and foreign
direct investment. In order to regulate the insurance business,
Insurance Regulatory and Development Authority (hereinafter to be
referred as “IRDA”) was established.
• In this article, the researcher has dealt with the reforms which the
Insurance Laws (Amendment) Act has introduced. In March 2015,
Insurance Laws (Amendment Act) was passed. This amendment
act amended the Insurance Act, 1938, the General Insurance
Business (Nationalisation) Act, 1972 and the Insurance Regulatory
and Development Authority Act, 1999.
• The first part of the article briefly deals with the journey which the
amendment bill has traversed in order to get passed by both the
houses of the parliament, get the assent of the president and
become an act.
• The latter parts deal with the various provisions it has amended like
raising the cap on foreign direct investment, substantial increase in
the penalties, making SAT the appellate tribunal, etc. The
researcher has tried to provide a holistic view of these reforms.
4.2 JOURNEY OF PASSING THE AMENDMENT ACT
This amendment act has brought out the reforms which had been almost
waiting for a decade. While discussing the 2004-05 Union Budget, Mr. P.
Chidambram, finance minister in UPA government, announced the plan
to increase the foreign direct investment cap in insurance to 49% from
26%. In 2005, a committee headed by Mr. KP Narasimhan was formed
in order to suggest amendments to existing insurance laws. Finally, in
December 2008, the Insurance Laws (Amendment) Bill, 2008 was
45
introduced in the upper house by the UPA government. The Bill was
referred to the Standing Committee on Finance. Post general elections
in September 2009, the bill was once again referred to a newly
constituted Standing Committee. This committee took almost two long
years to submit its report on the matter concerned. This committee led
by Yashwant Sinha (former finance minister) recommended that raising
FDI limit in insurance sector was not a feasible idea.
In July, 2014 with the new government at the center, the entire process
of bringing in reforms in insurance sector started again. In July 2014,
NDA government after making certain amendments in the 2008 Bill
circulated it in the Parliament, with raising FDI to 49% as a crucial part of
the Bill. In August, the Bill was referred to the Select Committee of Rajya
Sabha. Due to certain reasons, the report which was to be submitted in
first week of the winter season got delayed. As the Bill was taking
considerable amount of time to pass due to strong opposition in Rajya
Sabha, the Union Cabinet approved the ordinance to pass the insurance
law reforms. With the President’s sign, the cap of foreign direct
investment in the insurance sector was raised to 49%. On March 4,
2015, the Lok Sabha passed the Insurance Laws (Amendment) Bill,
2015 and around a week later on March, 2015, the Rajya Sabha also
passed the bill, with which the parliament passed the bill and became an
act by getting president’s assent on March 20, 2015.
Foreign investment in Insurance sector
• The act increases the cap on foreign investment in insurance
companies from 26% to 49%. This foreign investment can include
both foreign direct investment and portfolio investment. The
justification which is provided for increasing the allowed foreign
investment is that “Insurance is a capital-intensive industry.
• The insurance companies need to provide for future claims. If we
provided legislative assurance and stability, foreign capital would
come in which will help in expanding the insurance coverage in the
country,” as per Jayant Sinha (then Ministry of Finance, State).
• It has been pointed out by various analysts that this 49%
composite cap (FDI and portfolio) will have threefold benefit, firstly,
in case of joint ventures, it will allow the foreign partners to
increase their stake.
• Secondly, it will open the insurance sector to new insurance
companies.
• Thirdly, will help the domestic promoters who have been restricted
by cash consideration to trade-off their stake to private equity or in
46
favor of other investors. The amendment has been brought in a
manner that the company still needs to be owned and controlled by
Indian.
• The control here denotes what is meant by control in general
parlance in corporate field that is control over appointment of
majority of directors, policy or management decisions, etc. On
October 19, 2015, IRDA issued guidelines to clarify the meaning of
the phrase “Indian owned and controlled”.
4.3 INSURANCE REGULATORY & DEVELOPMENT AUTHORITY
(IRDA)
Insurance Regulatory & Development Authority, also called IRDA, is the
supreme authority that authorizes the functioning of insurance business
in India. It was established by the IRDA Act, 1999. The primary purpose
of IRDA is to safeguard the interests of the policyholders and also to
ensure the growth of insurance in the country. Various roles and
functions of IRDA have been discussed in this article.
1. Objectives of IRDA
IRDA aims to:
• Carry forward the interests of the policyholders.

• Uphold the development of the Insurance Sector.
• Ensure quick resolution of claims.
• Prevent frauds and malpractices.
• Ensure fair conduct in the financial market when dealing with the
insurance.
4.4 PRIVATISATION OF INSURANCE
The government’s ‘Atmanirbhar’ movement, among various other
objectives, set the stage for India to become a major global investment
hub. Under the new privatization policy, the central government is also
likely to classify insurance as a strategic sector. Ritu weighs in on why
categorizing insurance as a strategic sector will be a move in the right
direction. It outlines principal ways in which insurance industry impacts
economic and societal development, making it a strategic sector poised
for deeper investments and highlights how foreign investment can add
greater value.
Nearing the end of World War II, Winston Churchill famously said,
“Never let a good crisis go to waste.” In a distant yet somewhat
analogous context, Churchill’s words seem to resonate with the global
crisis unfolding today, especially as governments strive for a new world
order in wake of Covid-19.
47
With the introduction of ‘Atmanirbhar’ or ‘Self-Reliant’ movement, the
Government of India has made a most significant, initial effort at turning
adversity into opportunity. Among myriad other objectives, the move is
set to open gates for the private sector, attract foreign investments and
promote robust growth, for revival of the economy in the short term and
improvement in medium-term potential.
Setting the stage for India to become a major global investment hub,
under the new privatization policy, the central government is also likely
to classify insurance as a strategic sector. If implemented, it would make
insurance one among 18 identified strategic sectors where the
government will privatize its public sector enterprises, with a minimum of
just one and maximum of four PSUs then operating within the sector.
Given the insurance industry’s significant impact on overall financial
growth of the economy, greater private sector participation can infuse
technology, innovation and best management practices, while also
enhancing the overall role of insurance companies towards economic
growth.
4.5 LIBERALIZATION IN INSURANCE SECTOR
Although Indian Economy started opening up both to private sector and

to foreign investment in the year 1991, Insurance sector still remained
the domain of Govt. of India. However, the Government realized that
there was a need to bring reforms in the Insurance Sector in case this
sector has to evolve. With a view to bring reforms in the Insurance
Sector the Central Government formed Malhotra Committee headed by
former Finance Secretary and RBI Governor R.N. Malhotra in the year
1993. Thus, the Malhotra committee was set up with the objective of
complementing the reforms initiated in the financial sector. The reforms
were aimed at creating a more efficient and competitive financial system
suitable for the requirements of the economy keeping in mind the
structural changes currently underway and recognizing that insurance is
an important part of the overall financial system where it was necessary
to address the need for similar reforms. In 1994, the committee
submitted the report and some of the key recommendations included:
A. Structure
i. Government stake in the insurance Companies to be brought
down to 50%.
ii. Government should take over the holdings of GIC and its
subsidiaries so that these subsidiaries can act as independent
corporations.
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iii. All the insurance companies should be given greater freedom to
operate.
B. Competition
i. Private Companies with a minimum paid up capital of Rs.1bn
should be allowed to enter the sector.
ii. No Company should deal in both Life and General Insurance
through a single entity.
iii. Foreign companies may be allowed to enter the industry in
collaboration with the domestic companies.
iv. Postal Life Insurance should be allowed to operate in the rural
market.
v. Only one State Level Life Insurance Company should be allowed
to operate in each state.
C. Regulatory Body
i. The Insurance Act should be changed.
ii. An Insurance Regulatory body should be set up.
iii. Controller of Insurance- a part of the Finance Ministry- should be
made independent
D. Investments
i. Mandatory Investments of LIC Life Fund in government securities
to be reduced from 75% to 50%.
ii. GIC and its subsidiaries are not to hold more than 5% in any
company (there current holdings to be brought down to this level
over a period of time)
E. Customer Service
i. LIC should pay interest on delays in payments beyond 30 days.
ii. Insurance companies must be encouraged to set up unit linked
pension plans.
iii. Computerization of operations and updating of technology to be
carried out in the insurance industry.
The committee emphasized that in order to improve the customer
services and increase the coverage of insurance policies, industry
should be opened up to competition. But at the same time, the
committee felt the need to exercise caution as any failure on the part of
new players could ruin the public confidence in the industry. Hence, it
was decided to allow competition in a limited way by stipulating the
minimum capital requirement of Rs.100 crores. The committee felt the
need to provide greater autonomy to insurance companies in order to
improve their performance and enable them to act as independent
companies with economic motives. For this purpose, it had proposed
49
setting up an independent regulatory body- The Insurance Regulatory
and Development Authority.
4.6 INDIAN INSURANCE MARKET
Indian Insurance in the Global Scenario
1) In life insurance business, India is ranked tenth in the world.
India's share in global life insurance market was 2.73 per cent
during 2019. Compared to the previous year, the life insurance
premium in India increased by 9.63 per cent whereas global life
insurance premium increased by 1.18 per cent.
2) In non-life insurance business, India is ranked 15 in the world.

India's share in global non-life insurance market was 0.79 per cent
during 2019. Compared to the previous year, the non-life
insurance premium in India increased by 7.98 per cent whereas
global non-life insurance premium increased by 3.35 per cent.
3) Globally, the share of life insurance business in total premium was
46.34 per cent and the share of non-life insurance premium was
53.66 per cent during 2019. However, the share of life insurance
business for India was high at 74.94 per cent while the share of
non-life insurance business was at 25.06 percent.
Insurance Penetration and Density
1) Insurance penetration and density are two metrics, among others,
often used to assess the level of development of the insurance
sector in a country. While insurance penetration is measured as
the percentage of insurance premiums to GDP, insurance density
is calculated as the ratio of premiums to population (per capita
premium).
2) Insurance penetration which was 2.71 percent in 2001 has steadily
increased to 3.76 percent in 2019 (Life 2.82 percent and Non-Life
0.94 percent). Insurance penetration in some of the emerging
economies in Asia, i.e., Malaysia, Thailand and China during the
same year were 4.72, 4.99 and 4.30 percent respectively. The
insurance density in India which was USD 11.5 in 2001, reached
to USD 78 in 2019 (Life- USD 58 and Non-Life - USD 20). The
comparative figures for Malaysia, Thailand and China during the
same period were USD 536, USD 389 and USD 430 respectively.
Globally insurance penetration and density were 3.35 percent and
USD 379 for the life segment and 3.88 percent and USD 439 for
the non-life segment respectively in 2019.
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Insurance Premium
1) During the fiscal 2019-20, the gross direct premium of Non-Life
insurers was 1,88,916 crores as against 1,69,448 crores, in the
previous financial year 2018-19 registering a growth of 11.49
percent. Motor and health segments primarily helped the industry
to report this growth.
2) During the fiscal 2019-20, Life insurance industry recorded a
premium income of 5,72,910 as against 5,08,132 crores in the
previous financial year, registering a growth of 12.75 percent.
While renewal premium accounted for 54.75 percent of the total
premium received by the life insurers, new business contributed
the remaining 45.25 percent.
4.7 NEW ENTRANTS TO INDIAN INSURANCE MARKET
The insurance industry in India is a pool of insurance companies
hedging insurance seekers against risk through the means of insurance
contracts. The contract is an agreement between the insurer and the
insured in which the payment of the former guarantee for an uncertain
event against a premium paid by the insured regularly. The premium is
mentioned in the contract.
Insurance is a method of risk management to protect people and assets
from uncertain losses. Life Insurance is precisely planned to protect your
legatee financially in case something unfortunate happens to you. For
investors, insurance is seen as the slow-growing, safe sector when
compared to other financial sectors.
Digitalisation
In the months gone by, insurers have started to realise the fact that the
traditional approach of selling insurance products to the customers will
no longer be near enough for the insurers who wish to stay ahead of
their competitors. The foundation of the entire insurance industry is
based on offering products and services to the customers that help them
stay protected against loss as a result of an unfortunate event. And, in
the new year, while this will continue to remain an important element of
what insurers do, we will also witness a technology-driven shift in the
way insurance is sold.
The insurers will focus more on selling insurance products through tele-
medical process which is need of the hour. This will be complemented
by e-KYC process for completing the verification process of the
customers to buy a health and tern insurance plan. During the ongoing
51
COVID-19 pandemic, the digital shift towards selling insurance policies
has gained significant traction is sure to continue in the years to come.
Buying insurance through digital channels ease the buying process and
gives customers a plethora of options to select the right insurance
product as per their choice and requirement.
New Insurance Products
The awareness around need for protection has increased by many folds
since the onset of the pandemic. The need for insurance has become
ubiquitous with maximum people investing in insurance products as per
their requirements. Interestingly, demand for insurance products for a
plethora of risks that were usually not covered by insurance companies
has started gaining traction. These covers range from protection against
a pandemic to protection against seasonal illnesses like dengue. Though
they would prefer to pay a decently priced premium for these policies.
For instance, the Corona Rakshak plan, that is available for a time
period of 3.5 months to 9.5 months and is available for a premium as low
as Rs. 100/month. With the availability of such products digitally as well,
these will rightly cater to the digitally-savvy generation of people.
Rise in Demand for Standardised Products

The year 2021 will be the year of Standard Insurance Products. In the
year 2020, all general and specialised health insurers on the directions
of the IRDAI came up with standard health insurance product – Arogya
Sanjeevani. Later, the regulatory guided all life insurers to come up with
a standard term life insurance plan – Saral Jeevan Bima from January
1st 2021. Later, the regulator asked insurers to come up with a standard
Personal Accident Cover and, now the regulatory body has asked
insurers to launch a standard Travel Insurance from April 1st 2021. The
introduction of standard insurance products across all major insurance
sectors – Health, Life and Travel – IRDAI is leaving no stone unturned to
increase the insurance penetration rate in the country. The regulator
aims at bringing maximum people under the insurance umbrella and
provide them with maximum financial help.
All these standard products are expected to gain pace in the year 2021
with many more people enrolling themselves under these products. In
the last 10 months, people have well realised the importance of
insurance and the need to stay protected. A majority of people in India
are not covered under any insurance product and these standard
products will give first-time buyers a boost and confidence. The standard
features and wordings of these products will make them the first choice
of buyers who cannot afford a comprehensive insurance policy.
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Moreover, many more standard insurance products are expected to
come up in the new year.
On-demand Insurance
Another category of insurance products that will be in high demand in
the year 2021 is Switch-on and Switch-off insurance. Today’s consumer
looks for products that offer their adequate coverage only when they
need it. An excellent example of one such product is Usage-based car
insurance. This new type of car insurance policies – launched under the
sand-box category of IRDAI – allows car owners to ensure their vehicles
for kilometres they tend to drive instead of the run of the mill full year.
For all those looking for a car insurance policy that’s priced based on
how much you actually drive, pay-as-you-use insurance may be the
answer. For drivers who aren’t constantly on the road, these plans could
offer an opportunity to reduce car insurance costs. Moreover, the option
to have multiple vehicles covered under one policy makes this policy
more value accretive.
Wellness Products and IoT
Over the years, the structure and features of health policies have
evolved significantly in order to cater to the specific needs and
requirements of the customers. Customers have started practicing a
healthy lifestyle backed by efficient and effective wellness and
preventive healthcare measures. The coming year will see insurers
come up with plans that focus on making customers fit and health. Even
the insurance regulator has issued guidelines to insurers on wellness
and preventive features. The insurers are expected to come up with a
plethora of exciting benefits to offer to the policyholders. Some of such
benefits include discounted OPD consultations or treatments,
Pharmaceuticals, Health check-ups/diagnostics, redeemable vouchers
to obtain health supplements, memberships in yoga centres, sports
clubs and many more.
Yet another prominent technology that will play an important role in
shaping the online insurance industry in the coming years is Internet-of-
Things (IoT). The technique will help the insurers – especially the auto
insurance industry – to cut their overall costs while enabling the
customers to automatically initiate the damage repair and claim process.
At the same time, a significant focus of the insurers on customer
interaction and experience will brought about the need for Voice
Analytics – an efficient voice recognition tool to analyse and record a
spoken conversation.
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The Future of Insurance Industry in India
The future looks promising for the life insurance industry in India.
Several changes in the regulatory framework have been proposed which
may transform the way the industry conducts its business and engages
with customers.
As per the data from sectoral regulator IRDAI, the gross direct premiums
of non-life insurers in India grew nearly 7% to Rs 14,809.27 crore in
June this year. The general insurance industry is expected to increase
by 7-9% in terms of gross direct premium income in FY22, backed by
healthy growth from the health and motor segments.
Demographic factors such as the growing middle class, young insurable
population and retirement planning will support the growth of the Indian
life insurance segment.
LET US SUM UP
The insurance industry’s significant impact on overall financial growth of
the economy, greater private sector participation can infuse technology,
innovation and best management practices, while also enhancing the
overall role of insurance companies towards economic growth
CHECK YOUR PROGRESS

1) New privatization policy, the central government is also likely to
classify insurance as a
a) strategic sector b) important sector
c) Useful sector d) unique sector
2) IRDAI came up with standard health insurance product
a) Saral Jeevan Bima b) Arogya Sanjeevani
c) health policy d) children policy
3) The introduction of standard insurance products across all major
insurance sectors
a) retirement b) Health, Life and Travel
c) education d) None of these
4) In life insurance business, India is ranked ---------- in the world
a)7th b) 6th
c) 2nd d) 10th
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5) In non-life insurance business, India is ranked --------- in the world
a) 2nd b) 4th
c) 15th d) 10th
GLOSSARY
Privatisation of : greater private sector participation can infuse
insurance technology
Liberalization In : The reforms were aimed at creating a more
Insurance Sector efficient and competitive financial system
suitable for the requirements of the economy
keeping in mind the structural changes
currently underway and recognizing that
insurance is an important part of the overall
financial system where it was necessary to
address the need for similar reforms
New entrants to : Insurance industry to continue to see merger
Indian Insurance and acquisitions deals, new entrants In order
Market to equip itself with the complexities of merger
and acquisitions,
SUGGESTED READINGS
Limited
Limited
WEB RESOURCES
video
2. Insurance Market Insights: Emerging Trends to Watch - Bing
video
3. 5 New Trends for the Insurance Industry - Bing video
4. Insurance Industry Trends -- Towers Watson - Bing video
1 .a) 2.b) 3.c) 4 .d) 5 .c)
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BLOCK 2
LIFE INSURANCE
UNIT 5 : PRINCIPLES OF LIFE INSURANCE
UNIT 6 : ROLE OF LIFE INSURANCE
UNIT 7 : PREMIUM POLICY AND MODE OF PAYMENT

UNIT 8 : REVIVAL, BONUS AND SURRENDER VALUE
56
UNIT 5
PRINCIPLES OF LIFE INSURANCE

STRUCTURE
Overview
Learning Objectives
5.1 Utmost good faith
5.2 Insurable interest
5.3 Concept and definitions of life insurance

5.4 Nature of life insurance
5.5 Principles of life insurance
5.5.1 Principle of Utmost Good Faith

5.5.2 Principle of Proximate Cause
5.5.3 Principle of Insurable interest
5.5.4 Principle of Indemnity
5.5.5 Principle of Subrogation
5.5.6 Principle of Contribution
5.5.7 Principle of Loss Minimisation

5.6 Characteristics of life insurance
5.7 Life insurance products /type of life insurance policies

5.8 Characteristics of insurable risk
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
we explained one of the important types of Insurance i.e., Life Insurance.
If somebody suffer economic hardship and dies, at that time Dependent
Survivors needs life Insurance. Life Insurance is a way to replace the
57
loss of Income that occurs when the earning member of family dies. It is
a contract between insured phases and the company that is providing
the Insurance. If insured pus on dies while the contract is in force, the
insurance company pays a specified sum of money to the person on
persons you name as beneficiaries. Life insurance is a contract between
a policyholder and a life insurance company. Policyholders agree to
make premium payments to the company, and the company agrees to
pay the beneficiaries a sum of money at the time of death or at the
expiry of certain period.
LEARNING OBJECTIVES
• point out the meaning and nature of Life Insurance
• explain the various principles applicable to life insurance
contract.
• discuss the role and importance of insurance
• list out the various Life insurance products in India

• explain the concept of characteristics of insurable risk
5.1 UTMOST GOOD FAITH
The commercial contracts are normally subject to the principle of

“Caveat Emptor” i.e., let the buyer beware. In most of these contracts
each party to the contract can examine the item or services which is the
subject matter of contract. For e.g. If you go to the market to buy
vegetables, then you have to be careful yourselves about quality while
buying the vegetables and after buying you cannot question the vendor.
Each party believes in the statement of the other party. So long as there
is no attempt to mislead & the answers are given truthfully, the question
of avoiding the contract would not arise.
In the Insurance contract the product sold is intangible. It cannot be seen
or felt. Most of the facts relating to health, habits, personal history and
family history are known to one party only, the proposer. The insurer can
know most of these facts only if the proposer decides to disclose these
facts. It is true that the underwriter can have the assistance of medical
report for life Insurance proposal. Sometimes, these aspects are not
detected by the medical examination. e.g., a person suffering from high
B.P. or diabetes can manage to hide these facts from the examining
doctor. The history of past serious sickness, operations and injuries can
be suppressed. These aspects may affect the life expectancy of the
proposer. Hence, these constitute material information from the
58
underwriter’s point of view. Non-disclosure of such facts would put the
insurer as well as the community of policyholders at a disadvantage.
It is for these reasons that the law imposes a greater duty on the parties
to an insurance contract than in case of other commercial contracts. This
duty is one of utmost good faith (uberrima fides). It is the duty of the
assured to make a full disclosure to the underwriter without being asked.
In a contract of Insurance, there is an implied condition that each party
must disclose every material fact known to him. This type of contract is
called uberrima fides i.e., contract of utmost good faith.
Hence utmost good faith can be defined as a positive duty to disclose
accurately & fully all facts material to the risk being proposed whether
requested or not.
Warranty
A warranty in Insurance is a statement or condition which is incorporated
in the contract relating to risk, which the applicant presents as true &
upon which it is presumed that the insurer relied in issuing the contract.
In fact, Marine Insurance developed the doctrine of warranty because
the marine underwriter was rarely called upon or got a chance to inspect
the ship as it might be lying thousands of miles away at ports or in
voyage. Therefore, he had to depend entirely upon the word of the
person seeking the Insurance. Hence, all information in the application
for the Insurance was warranted to be absolutely exact and true. If it
turned out to be untrue, the Insurance was voidable whether the
misstatement was intentional or unintentional, material to the loss or
immaterial.
Principle of Indemnity
Indemnity according to the Cambridge International Dictionary is
“Protection against possible damage or loss” and the Collins Thesaurus
suggests the words “Guarantee”, “Protection”, “Security”,
“Compensation”, “Restitution” and “Reimbursement” amongst others as
suitable substitute for the word “Indemnity”. The words protection,
security, compensation etc. are all suited to the subject of Insurance but
the dictionary meaning or the alternate words suggested do not convey
the exact meaning of Indemnity as applicable in Insurance Contracts.
In Insurance the word indemnity is defined as “financial compensation
sufficient to place the insured in the same financial position after a loss
as he enjoyed immediately before the loss occurred.”
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Indemnity thus prevents the insured from recovering more than the
amount of his pecuniary loss. It is undesirable that an insured should
make a profit out of an event like a fire or a motor accident because if he
was able to make a profit there might well be more fires and more
vehicle accidents.
As in the case of Insurable Interest, the principle of indemnity also relies
heavily on the financial evaluation of the loss but in the case of life and
disablement it is not possible to be precise in terms of money
5.2 INSURABLE INTEREST
The Insurance Act 1938 doesn’t define the insurable interest but it has
been defined as follows by Mac-Gillivray “Where the assured is so
situated that the happening of the event on which the Insurance money
is to become payable would as a proximity cause, involve the assured in
the loss or diminution of any right recognised by law or in any legal
liability there is an insurable interest in the happening of that event to the
extent of the possible loss or liability.”
The object of Insurance should be lawful for this purpose, the person
proposing for Insurance must have interest in the continued life of the
insured & would suffer pecuniary loss if the insured dies. If there is no
insurable interest, the contract becomes wagering (gambling) contract.
All wagering contracts are illegal & therefore null & void.
Own Life Policy
So long as the Insurance is on one’s own life, the “Insurance Interest”
presents no difficulty. A person has insurable interest in his own life to
an unlimited extent. The absence of a limit in this case is reasonable.
When a person ensures his life, he obtains protection against loss to his
estate; for in the event of his untimely death the estate would not benefit
by the future accumulation he hopes to make during the normal span of
life. It is not easy to compute with any degree of certainty what the future
earnings of a person would be. Hence no limit may be fixed in respect of
life Insurance he may affect.
Where, however, insurer rejects a proposal for an amount of assurance,
which is disproportionate to the means of the proposer, it is not normally
for lack of Insurable interest but on considerations of “moral hazard”.
Indeed, it may also be presumed in a case where a person proposes for
a policy for a large amount, which he may not be able to maintain having
regard to his income, that it will be financed by some other person and
that there is no insurable interest.
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5.3 CONCEPT AND DEFINITIONS OF LIFE INSURANCE
Life insurance is a way of providing income replacement for financial
dependents (the beneficiaries) after the insured person dies. It is
intended to replace lost income and pay for any additional expenses that
are experienced by those left behind when a family member who
contributes income or services to a household is lost. It can also be used
for final expenses like medical bills or funeral costs that survivors would
have to pay when a death occurs. Life insurance is an important part of
financial planning for families and individuals.
It provides financial protection against the risk of early death. The life
insurance contract can be described as a ‘Contingent Contracts’
because the loss of life cannot be compensated and only a specified
sum of money is paid if the insured dies.
Definitions of Life Insurance
1. “Life insurance contract is a contract whereby a person (insurer)
agrees for a consideration (that is payment of a sum of money) or a
periodical payment, called the premium to pay to another (insured
or his estates) a stated sum of money on happening of an event
dependent on human life.
2. “Life insurance is a contract to pay a certain sum of money on the
death of a person in consideration of the due payment of a certain
annuity for his life calculated according to the probable duration of
life.
3. “A life insurance policy promises that the insurer would pay to the
policy holder certain sum of money if the person insured dies, or
any other specified contingency happens
5.4 NATURE OF LIFE INSURANCE
A brief survey of insurance literature reveals differences of opinion
among authors concerning how the term insurance should be defined.
Regardless, however, the literature agrees that insurance has to contain
both of the following elements: (1) risk pooling and (2) risk transfer. The
risk pooling creates a large sample of risk exposures and, as the sample
gets larger, the possibility of missing future loss predictions gets lower.
This is the law of large numbers, discussed further in the box below,
“Law of Large Numbers.” The combination of risk pooling and risk
transfer (from the owner of the risk to a third, unrelated party) physically
reduces the risk, both in number and in the anxiety it causes. As such,
we regard insurance as a social device in which a group of individuals
transfer risk to another party in such a way that the third party combines
or pools all the risk exposures together.
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The analysis of above definitions explains the nature of insurance as
follows.
1. Life Insurance is a Contract
Life Insurance is a contract between two parties i.e. insurer and
insured by which the insurer, in consideration of insurance
premium, agrees to pay the certain amount to the insured against
certain probable unexpected incidence. In life insurance, insurance
company pay certain sum of money on the death of the insured
person or if insured is alive, paid to them the amount of premium
with interest and bonus.
2. Cooperative device
All for one and one for all is the basis for cooperation. A life
insurance is a good example of cooperative device to spread the
loss caused by a specific event. Insurance is based on the principle
of mutual help. Under this arrangement persons exposed to same
risks come together and create a common fund and compensate
the person who has actually suffered the loss. In other words, life
insurance is a cooperative mechanism wherein large number of
persons comes together. They have similar risk and share the loss
by contributing a small amount in the form of premium. Thus, it is
cooperative device, which is helpful to society to protect the family,
if the policy holder dies before maturity date of the policy.
3. Large number of Person
Life insurance mechanism works on the principle of large number
of insured persons. Insurance is spreading of loss over a large
number of persons. The persons involved in life insurance collect
the amount in the form of premium and such amount is paid to
persons who actually suffer the risk.
4. Sharing of risk
Life insurance is a social and economic device. It shares the
financial loss occurred caused by unexpected incidence between
the public who are exposed to risk. The death of the insured,
illness, disable due to accident etc. may cause a tremendous loss
to the insured. Under life insurance mechanism this risk shared
amongst all the insured in the form of premium. Life insurance
provides financial help to dependents of insured, if he dies before
the maturity date.
5. Uncertainty
The event to be insured must be uncertain and unforeseen.
However, In life insurance even though death of insured person is
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certain its timing is uncertain. Hence life insurance is also a legal
contract.
6. Payment of claim
In case of life insurance, the contingency i.e. death or the maturity
of the policy will certainly happen. In such case insurer is liable to
pay the policy amount on the death of the insured or on the expiry
of the term whichever is earlier. If insured dies before date of
maturity of the life policy, sum assured will receive by the legal heir
or nominee of the policy holder.
7. Insurable interest
The interest of the insured in the subject matter of insurance is
called as insurable interest. In the life insurance the life of the
person is the subject matter. In life insurance contract the insurable
interest should exist at the time of taking insurance. Husband and
wife, other relatives e.g., father, mother, independent son or
daughter etc., partners, Debtors and Creditors, trustee etc. can
hold Insurable Interest.
8. Life insurance is not an Indemnity contract
Though life insurance is a contract, it is not a contract of indemnity.
Because the loss caused by the death cannot be calculated in
terms of money nor money is a compensation for loss of one’s life.
Life insurance contracts are an exception to the principle of
indemnity. He can also take life policies of any amount as the loss
of death cannot be measured in monetary terms.
9. Protection to family
Life insurance protects the families from the economic hardship, if
insured dies before the maturity of policy. It is the basic principle of
the life insurance to save a person from uncertain future incidents
such as premature death, old age, accident etc.
10. Life Insurance is not a charity but business
Life insurance is a business which provides financial protection to
the life of insured from unforeseen event. However, insurance
company collect the amount of premium as a consideration form
insured for the cost of risk so covered. Charity is a payment without
claiming anything in return.
11. Investment of Saving
It is the differential characteristic of the life insurance. Life
insurance combines the element of protection and investment.
There is not any other mechanism or device, which involves both
the elements of protection and investment. Though the insured is
interested in protecting his life against risk of premature death, he
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also wants to save or invest some amount for fulfillment of future
needs. Life insurance provides assurance to meet future financial
needs particularly arises due to old age, premature death or
accident or any unforeseen events.
5.5 PRINCIPLES OF LIFE INSURANCE
The concept of insurance is risk distribution among a group of people.
Hence, cooperation becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer
and the insured have to uphold the 7 principles of Insurances mentioned
below:
1. Utmost Good Faith
2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization
8. Nature of contract
Let us understand each principle of insurance with an example.
5.5.1 Principle of Utmost Good Faith
A life insurance policy is a two-way contract. Hence, there must be good
faith established between the insurer and the insured person. It is of
utmost importance that the policyholder provides the relevant details
with honesty to the insurance company. The client is bound to disclose
all the facts properly. Concealing the information may result in
complications and serious consequences. In the same way, the
company must also be faithful to clients and clearly state all the clauses
and aspects of the policy to its clients.
The Insured should provide all the information related to the subject
matter, and the insurer must give precise details regarding the contract.
Example – Jacob took a health insurance policy. At the time of taking

insurance, he was a smoker and failed to disclose this fact. Later, he got
cancer. In such a situation, the Insurance company will not be liable to
bear the financial burden as Jacob concealed important facts.
5.5.2 Principle of Proximate Cause
This is also called the principle of ‘Causa Proxima’ or the nearest cause.
This principle applies when the loss is the result of two or more causes.
The insurance company will find the nearest cause of loss to the
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property. If the proximate cause is the one in which the property is
insured, then the company must pay compensation. If it is not a cause
the property is insured against, then no payment will be made by the
insured.
This principle is concerned with the discovery of the dominant effective
cause or the nearest cause that produced the loss being claimed for
under the insurance. It means that in case of damage, the direct cause
is considered. Hence, this principle is only applicable when the loss has
occurred as a result of two or more causes. The principle does apply to
every other materialistic policy, but comparatively, it has rather less
significance with life insurance
Example –
Due to fire, a wall of a building was damaged, and the municipal
authority ordered it to be demolished. While demolition the adjoining
building was damaged. The owner of the adjoining building claimed the
loss under the fire policy. The court held that fire is the nearest cause of
loss to the adjoining building, and the claim is payable as the falling of
the wall is an inevitable result of the fire. In the same example, the wall
of the building damaged due to fire, fell down due to storm before it
could be repaired and damaged an adjoining building. The owner of the
adjoining building claimed the loss under the fire policy. In this case, the
fire was a remote cause, and the storm was the proximate cause; hence
the claim is not payable under the fire policy.
5.5.3 Principle of Insurable interest
This principle says that the individual (insured) must have an insurable
interest in the subject matter. Insurable interest means that the subject
matter for which the individual enters the insurance contract must
provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.
Example – the owner of a vegetable cart has an insurable interest in the
cart because he is earning money from it. However, if he sells the cart,
he will no longer have an insurable interest in it. To claim the amount of
insurance, the insured must be the owner of the subject matter both at
the time of entering the contract and at the time of the accident.
5.5.4 Principle of Indemnity
This principle says that insurance is done only for the coverage of the
loss; hence insured should not make any profit from the insurance
contract. In other words, the insured should be compensated the amount
65
equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same
financial position as he was before the loss occurred. Principle of
indemnity is observed strictly for property insurance and not applicable
for the life insurance contract.
Example – The owner of a commercial building enters an insurance
contract to recover the costs for any loss or damage in future. If the
building sustains structural damages from fire, then the insurer will
indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by
reconstructing the damaged areas using its own authorized contractors.
5.5.5 Principle of Subrogation
Subrogation means one party stands in for another. As per this principle,
after the insured, i.e. the individual has been compensated for the
incurred loss to him on the subject matter that was insured, the rights of
the ownership of that property goes to the insurer, i.e. the company.
Subrogation gives the right to the insurance company to claim the
amount of loss from the third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless

driving of a third party, the company with which Mr A took the accidental
insurance will compensate the loss occurred to Mr A and will also sue
the third party to recover the money paid as claim.
5.5.6 Principle of Contribution
Contribution principle applies when the insured takes more than one
insurance policy for the same subject matter. It states the same thing as
in the principle of indemnity, i.e., the insured cannot make a profit by
claiming the loss of one subject matter from different policies or
companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for
Rs. 3 lakhs and with company B for Rs.1 lakhs. The owner in case of
damage to the property for 3 lakhs can claim the full amount from
Company A but then he cannot claim any amount from Company B.
Now, Company A can claim the proportional amount reimbursed value
from Company B.
This principle says that as an owner, it is obligatory on the part of the
insurer to take necessary steps to minimise the loss to the insured
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property. The principle does not allow the owner to be irresponsible or
negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take
reasonable steps to put out the fire. You cannot just stand back and
allow the fire to burn down the factory because you know that the
insurance company will compensate for it.
5.5.8 Principle of nature of the contract
Lastly, the nature of the contract is a fundamental determiner of
cooperation between the client and the company. Thus, the contract
should be simple and free of invalid information. The contract must also
be signed with the full consent of the client.
5.6 CHARACTERISTICS OF LIFE INSURANCE
1. Outcome of contract: The life insurance contract is the outcome
of an offer made by the insured and its acceptance by the insurer.
Life insurance contract is made in writing.
2. Payment of Premium: The insured is under an obligation to pay
the amount of premium till the death of the insured or the expiry of
the policy, whichever is earlier.
3. Payment of sum assured: The insurer agrees to pay the amount
either on death or on the maturity of the policy, whichever is
earlier.
4. Insurable Interest: Insurable interest of insured must exist in
person insured at the time when the policy is taken in case of
insurance. It may or may not be present at the time of insured’s
death.
5. Not a contract of Indemnity: Life insurance contract is not a
contract of indemnity the person loss cannot be indemnified only
the financial loss is indemnified.
6. Related risks to life: It is a contract relating to human life and the
payment is released to the insured or to the nominees only in case
when there is a risk to life (means in case of death or on the
maturity of policy, whichever is earlier)
7. Encouragement to savings: Life insurance is also considered to
be the best alternative for savings and moreover it is also tax free.
8. Financial Help: Life Insurance provides protection to those who
are support less and financial help in case of death of the insured.
9. Wider Scope: Life Insurance also covers other risks except death
which are related to human life, such as total or permanent
disability, medical expenses etc.
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5.7 LIFE INSURANCE PRODUCTS /TYPE OF LIFE INSURANCE
POLICIES
The life insurance companies have introduced different policies to meet
different needs of different people. The social and economic conditions
of different classes of the society are never equal or same. The
occupations, risks in occupations, income, economical needs,
expectations, priorities and difficulties are relatively different by person to
person. Hence, the different schemes need to be introduced.
A person who wants to buy an insurance product has to consider the
various factors such as the amount of sum assured, amount of premium,
source of income, type of risk, maturity time and circumstances at the
time of maturity etc. He can select one of best product from life
insurance products available in the market. Therefore, insurance
companies offer various types of life insurance products by considering
different needs and situation of the insured.
The following chart shows the various types of life insurance policies or
products offer by the insurance companies
The policies by which sum assured is paid to the

family members of the insured after his death.
Whole Life Policies
The premiums are to pay during the whole life of
insured.
The policies that offer sum assured to the insured

Endowment
if he survives a particular term and if he dies
Policies
before that term to his legal heirs.
The policies that offer sum assured on the death

Term Policies
of the insured during the specified period.
Policies that promise to pay a given amount

Pension and
periodically to the annuitant, during his lifetime,
Annuities
starting immediately or from a future date.
Unit linked A combination of insurance plan & investment

Insurance plans plan
For fulfilling your child’s life goals like education,

Child’s Plan
marriage, etc.
Retirement Plan Plan your retirement and retire gracefully
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Different Types of Life Insurance Policies/ Schemes in India
Let’s dive deeper to know each plan in detail.
1. Term Life Insurance
Term insurance is the simplest form of life insurance plan. Easy to
understand and affordable to buy.
A term insurance provides death risk cover for a specified period. In
case the life assured passes away during the policy period, the life
insurance company pays the death benefit to the nominee. It is a pure
risk cover plan that offers high coverage at low premiums.
There’s an option to add riders to widen up the coverage.

The death benefit is payable as lump sum, monthly payouts, or a
combination of both.
There’s no payout if the life assured outlives the policy term. However,
these days there are companies offering Term Plans with Return of
Premiums (TROPS), where insurance companies payback all the paid
premium amount in case the life assured outlives the term period. But
such plans are costlier than the vanilla term insurance plan.
Example: An individual non-smoker male who is looking for a term life
plan of Rs.1 crore cover, will cost him approximately Rs.6, 800 to Rs.10,
500 per year.
ANNUAL
SUM
AGE TERM PREMIUM
ASSURED
RANGE
Rs.6,800 –
25 years 40 years Rs.1 Crore
Rs.10,500
Best known for: High sum assured (coverage) at a low premium.

Benefit of Term Plan: In case of an untimely death of the breadwinner,
family is supported with an enormous amount of money – sum assured,
which helps them to replace the loss of the income caused due to the
breadwinner’s death. Moreover, the money could be utilized to pay off
loan, monthly household expenses, child’s education, child’s marriage,
etc.
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2. Unit Linked Plans (ULIPs)
A unit linked plan is a comprehensive combination of insurance and
investment. The premium paid towards ULIP is partly used as a risk
cover (insurance) and partly is invested in funds. One can invest in
different funds offered by the insurance company depending on his risk
appetite. The insurance company then invests the accumulated amount
in the capital market i.e., in bonds, equities, debts, market funds, or a
hybrid funds...
Example:
ANNUAL
SUM
TERM PREMIUM FUND VALUE
ASSURED
RANGE
Depending on
the fund value
20 years Rs.2 lakh Rs.20,000
at the time of
maturity.
Best known for: Long-term investment option with much more flexibility
to invest.
Benefit of ULIP: Invest money as per your risk appetite. You have the
option to invest either in equity, debt or in hybrid funds through the life
insurance company with complete transparency.
3. Endowment Plans
Endowment plan is another type of life insurance plan, which is a
combination of insurance and saving.
A certain amount is kept for life cover – insurance, while the rest is
invested by the life insurance company. In an endowment plan, if the life
assured outlives the policy term, the insurance company offers him the
maturity benefit. Moreover, Endowment Plans may offer bonuses
periodically, which are paid either on maturity or to the nominee under
death claim. On death, the death benefit is payable to the nominee.
Endowment plans are also commonly known as traditional life insurance,
although, there is an investment component, but the risk is lower than
the other investment products and so are the returns.
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Example:
ANNUAL
SUM
TERM PREMIUM BONUS
ASSURED
RANGE
Depending on
Rs.20,000–
30 years Rs.10 lakh the Bonus at the
Rs.25,000
time of maturity.
Best known for: Long-term saving option for people with much lower risk
appetite for investment.
Benefit of Endowment Plan: Long-term financial planning and an
opportunity to earn returns on maturity.
4. Money Back Life Insurance
Money back plan is a unique type of life insurance policy, wherein a
percentage of the sum assured is paid back to the insured on periodic
intervals as survival benefit.
Money back plans are also eligible to receive the bonuses declared by
the company from time to time. This way, policyholder can meet short-
term financial goals.
Example:
ANNUAL MATURITY
SUM PERIODIC
TERM PREMIUM BENEFIT
ASSURED RETURNS
RANGE
A Accrued
percentage bonuses/Guaranteed
of Sum Money Back +
Rs.20,000–
20 years Rs.5 lakh Assured Coverage
Rs.25,000
paid on
regular
intervals.
Best known for: Short-term investment product to meet short-term

financial goals.
Benefit of Money Back Plan: Short-term financial planning and an
opportunity to earn returns on maturity.
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5. Whole Life Insurance
A whole life insurance policy covers the life assured for whole life, or in
some cases, up to the age of 100 years. Unlike, term plans, which are
for a specified term.
The sum assured or the coverage is decided at the time of policy
purchase and is paid to the nominee at the time of death claim of the life
assured along with bonuses if any.
However, if the life assured outlives the age of 100 years, the insurance
company pays the matured endowment coverage to the life insured.
The premiums are higher as compared to term plans. Whole life

insurance plans also offer partial withdrawals after completion of
premium payment term.
SUM ASSURED
PREMIUM (WITH ANNUAL
MATURITY
PAYING GUARANTEED PREMIUM
BENEFIT
TERM MATURITY SUM RANGE
ASSURED)
Guaranteed
Sum Assured +
non-guaranteed
Rs.10,000–
20 years Rs.3lakhS bonus (if any) +
Rs.15,000
non-guaranteed
terminal bonus
(if any).
Best known for: Life coverage for whole life.

Benefit of Whole Life Plan: Lifelong protection to the insured and an
opportunity to leave behind a legacy for heirs.
6. Child Plan
Child plan helps to build corpus for child’s future growth. Child plans help
to build funds for child’s education and marriage. Most of the Child Plan
provides annual installments or one time payout after the age of 18
years.
In case of an unfortunate event, the insured parent passes away during
the policy term - immediate payment is payable by the insurance
company. Some child plans waive off the future premiums on death of
the life insured and the policy continues till maturity.
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ANNUAL MATURITY
SUM PERIODIC
TERM PREMIUM BENEFIT
ASSURED RETURNS
RANGE
Lump sum Maturity
payouts on benefit +
regular guaranteed
20 years Rs.18 lakh Rs.1 Lakh interval returns + non-
guaranteed
accumulated
bonus (if any)
Best known for: Building funds for your child’s future.

Benefit of Child Plan: Helps in fulfilling your child’s dream.
7. Retirement Plan
Retirement plan helps to build corpus for your retirement. Helping you to
live independently financially and without worries. Most of the child plans
provide annual installments or one time payout after the age of 60 years.
In case of an unfortunate event, life assured passes away during the
policy term - immediate payment is payable to the nominee by the
insurance company. Death benefit will be higher of coverage or fund
value or 105% of premiums paid. Vesting Benefit will be payable if the
life assured survives the maturity age. In which case, payout will be fund
value which has to be utilized for buying an annuity. Best known for:
Long-term savings and retirement planning.
Benefit of Retirement Plan: Helps in building corpus for retirement.
8. Unit linked Insurance Plans (ULIPs)
Under Unit linked Insurance Plan the investment is made subject to risk
associated with capital market. Such investment risk is borne by the
policy holder; hence, insured should make investment choice by
considering his risk attitude and need. In order to make life insurance
products more attractive and popular among the public the insurance
companies have launched unit-linked policies.
In India the Unit Trust of India, was the first to introduce a unit-linked
Insurance Plan in 1971. Birla Sun Life was the first private company to
launch a unit linked insurance products. Then it was followed by a
number of other private companies like Om Kotak Mahindra, ICICI
Prudential, SBI Life Insurance etc. Under public sector LIC launched its
first unit linked offer ‘Bima Plus.’
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Unit linked insurance policies are not a pure insurance product but they
are a hybrid product combining the insurance cover and capital market
instrument. It is a life policy which provides risk cover as well as
investment option to policy holder such as stocks, bonds or mutual
funds. Under ULIP plan the premium paid by insured is invested in
equity, debt or money market.
The policy holder will receive the assured benefits or the value of unit
linked investment whichever is higher at the time of maturity of the UIP
plan. The amount received under ULIP plan is exempt from Income Tax.
ULIP have a minimum lock in- period of five years. Within lock-in-period
policy holder cannot withdrawal any amount from this plan, however,
after completion of five years he make partial withdrawal.
Definition of ULIPs:
“A Unit Linked Insurance plan (ULIP) is a product offered by insurance
companies that unlike a pure insurance policy gives investors the
benefits of both insurance and investment under a single integrated
plan.”
5.8 CHARACTERISTICS OF INSURABLE RISK
Defining an Insurable Risk

Insurable risks are risks that insurance companies will cover. These
include a wide range of losses, including those from fire, theft, or
lawsuits.
When you buy commercial insurance, you pay premiums to your
insurance company. In return, the company agrees to pay you in the
event you suffer a covered loss.
By pooling premiums from many policyholders at once, insurers are able
to pay the claims of the few who do suffer losses, while providing
protection to everyone else in the pool in case they need it.
1) Fair Premiums
This means that the insurer must be able to cover claims and
expenses with premium income and thus if premiums must be set
too high then the risk is not insurable. An example of this would be
how California homeowner’s policies exclude earthquake losses
because the disasters happen so frequently, instead, carriers offer
stand-alone earthquake policies that result in a higher premium but
they cover the insured in the event of an earthquake.
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2) Risk Must Be Definable
Another characteristic of insurable risks is that the risk must be
definable. This means that the insurer can define the exact
conditions under which the item is covered by the policy. The item
that is being covered must also have a precise value and must be
definable meaning a house, car, diamond ring, etc.
3) Losses Must Be Unexpected
In order for a risk to be insurable, losses must be random and
unexpected. This means that the losses are unforeseeable,
reasonably unpreventable and are overall completely random in
nature. A prime example of a loss that isn’t insurable is flooding as
flooding has become expected depending on the area you live in.
4) Losses Must Be Substantial
Another qualification for a risk to be insurable is the loss must cause
a substantial economic hardship. This is why every policy has a
deductible so that losses that are not costly do not have to be paid
by the insurer.
5) Policy Must Have Exclusions

The insurer must exclude coverage for large scale and catastrophic
events such as war and terrorism, nuclear and missile attacks,
earthquakes, flood, wind events, etc.
6) Must Comply with the Law of Large Numbers
The last key quality of an insurable risk is that it must comply with
the law of large numbers. This means that the insured must insure a
large number of similar risks. This helps spread risk across more
policies and helps the insurer predict losses more accurately. An
example is homes, cars, lives, etc. This is why an auto insurer
cannot ensure a spaceship because they would only insure one
spaceship thus not enough similar risks.
LET US SUM UP
Life Insurance is one of the most popular and important forms of
insurance. Life insurance is insurance on human Life. Life Insurance is a
contract for payment of a sum of money to the person on the happening
of the event insured against. Usually, the insurance contract provides for
the payment of an amount on the date of maturity or at specified dates at
periodic intervals or at the unfortunate death if it occurs earlier. Though,
75
life insurance cannot avoid one's death, at least it tries to minimize the
economic burden, to some extent, of the family members by taking risk
of the insured.
CHECK YOUR PROGRESS
1. ____ is transferred from an individual or entity (insured) to a third
party (insurer).
a) risk
b) social
c) premium
d) annuity
2. Principle of proximate cause is also called as _______
a) lowest cause
b) nearest cause
c) longest cause
d) indemnity
3. ________ Principle applies when the insured takes more than
one insurance policy for the same subject matter.
a) contribution
b) subrogation
c) indemnity
d) loss of maximisation
4. Insurance generates funds by collecting______.
a) premium
b) discount
c) Annuity
d) compensation
5. Insurance does not only protect against risks and uncertainties,
but also provides an __________
a) investment
b) mutual funds
c) fixed deposit
d) long term funds
GLOSSARY
Risk pooling : Loss sharing is accomplished through premiums

collected by the insurer from all insured
Insurable : That the subject matter for which the individual

interest enters the insurance contract must provide some
financial gain to the insured and also lead to a
76
financial loss if there is any damage, destruction
or loss.
Loss of : It is obligatory on the part of the insurer to take

minimisation necessary steps to minimise the loss to the
insured property.
Utmost good : The fundamental principle is that both the parties

faith in an insurance contract should act in good faith
towards each other
Fair Premium : This means that the insurer must be able to cover
claims and expenses with premium income and
thus if premiums must be set too high then the
risk is not insurable.
SUGGESTED READINGS
Limited
Limited
5. Insurance Principles and Practice by S.Chand
6. Elements of Insurance by Dr.A.Murthy
WEB RESOURCES
1. PRINCIPLES OF INSURANCE - Bing video
2. Principles of insurance x 4 - Bing video
3. What is Insurance? in tamil | Principles of insurance in tamil | Legal
Knowledge - Bing video
ANSWER FOR YOUR PROGRESS
1.a) 2.b) 3.a) 4.a) 5.a)
77
UNIT 6
ROLE OF LIFE INSURANCE

STRUCTURE
Overview
Learning Objectives
6.1 Introduction
6.2 Importance of Life Insurance
6.3 Role of Life Insurance

6.4 Factors Influencing Demand for Insurance
6.5 Procedure for taking a Life Policy
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Life Insurance is one of the most popular and important forms of

insurance. Life insurance is an insurance on human Life. Man's life being
uncertain, he is prone to meet immature death, accident, disability, old
age etc. In such conditions life insurance provides the best source to the
family by providing funds to lessen the economic uncertainty. Life
insurance can be one of the most important purchases you make. It can
provide protection for family members in the event of a death, replace
income, cover education costs and much more. Life insurance can help
make sure the people you care about will be provided for financially,
even if you are not there to care for them yourself.
LEARNING OBJECTIVES
• study the role and importance of life insurance from the

perspective of an individual, business, and economy
• explain the factors influencing demand for insurance
• explain the procedure for taking a life policy
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6.1. INTRODUCTION
The concept of life insurance is based on two fundamental elements of
1) 'Death Cover' and 2) 'Survival Benefits'. According to the former
element, in the event of the death of an insured within the specific
period, his family members are liable to get the promised amount by the
insurance company and according to the later element, if the insured
survives after the specific period the insurance company undertakes to
pay him amount of Insurance. Though, life insurance cannot avoid one's
death, at least it tries to minimize the economic burden, to some extent,
of the family members by taking risk of the insured. It is extremely
impossible for a person or a company to evaluate human life in form of
money, though, a certain amount after the death of an insured is
promised to be paid and it is really a very great importance.
6.2. IMPORTANCE OF LIFE INSURANCE
The fast-growing industrial development and the revolution in transport
and communication system, no doubt have brought in prosperity, but at
the same time, these advancements have endangered human life
tremendously, have created tensions and uncertainty unprecedently.
The activities of the terrorists and extremists, industrial accidents,
transport accidents etc have reduced the security in human life.
In addition to the above, the floods, earthquakes, hurricanes and such
natural calamities and environmental / ecological imbalance have made
life much more uncertain. On one hand, the per capital income is rising,
but on the other hand, man's income making capacity is getting reduced.
A solution on all these, the life insurance has achieved great importance.
The importance of Life Insurance can be explained from the individual's,
economy's and in general, the social point of view.
A) From the Individual Person's Point of View
Life Insurance is extremely important from the individual person's point
of view. No one today can continue one's life free from anxieties without
taking life insurance. It is cent percent true that life insurance has no
substitute. By discussing some of the distinct advantages of life
insurance, its importance in man's life is enumerated in the following
ways.
1. Family Protection
The life of a family is dependent on the bread - earner, the head of
the family. Unfortunately, if he dies at an early age, the very support
of the family disappears, and the surviving dependents have to face
many financial difficulties. On such occasions, life insurance
79
provides funds to them immediately after the death of a policy
holder, life insurance therefore, is much superior as compared to
any ordinary investment, because it offers full protection to the family
members after the death of a policyholder.
2. Old Age Relief
A person by taking a life insurance policy can make provisions for
his old age and may lead a life of comfort and happiness. In the
nuclear family system today, there is no certainty about that the sons
would take care of their old parents. But the amount of insurance
received in old age will certainly prove a great relief. That would
make a person self - reliant.
3. Compulsory Savings
Taking Life Insurance encourages one to economize and save one's
hard-earned money compulsorily. When the income is limited and
dependents are many, it becomes very difficult to save regularly.
Somehow, if some money is saved, it could be expended by
momentary inducement. But when a person purchases a life
insurance policy, he can easily continue a long-term saving plan, by
regular payments of premiums. He gets habituated to control his
expenditure by force. This kind of saving is unique one, because it
provides security against the risk to life.
4. Provision to meet children's needs
The life insurance companies issue some schemes by which policy
holder can make provisions for meeting the needs of his children,
like expenditure of their higher education or marriages etc, In a
sense, life insurance provides assistance to a policy holder to
educate his children and make their bright careers. The marriage
expenditure can be met easily.
5. Provision for special needs
In case of emergency needs of the family, the loans can be obtained
on the basis of the security of life insurance policy. For instance, if a
person, unfortunately becomes physically disable or meets an
accident or falls seriously ill, he will have to be admitted to a hospital
where he will have to incur a lot of money on medical treatment.
During the time, his earning gets reduced for some time or stops
permanently. To meet such huge expenditures, buying a life
insurance policy is an ideal way of making provisions for.
6. Tax Relief
On payment of life insurance premium at certain tax relief is given in
the assessment of income tax. For computing income tax, the
premiums of life insurance are allowed to be deducted from taxable
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income. When this tax relief is taken into account, it will be found
that the insured actually pays much less than what he has to pay
against premiums.
7. Protection against creditors
By effecting a valid assignment of the policy, the sum assured can
be protected against the claims of the creditors of the policyholder.
In the event of his death, the person who nominated is entitled to the
benefits of the policy, as also a Married Women's Property Act
Policy, which protects the interests of the wife and children.
8. Nomination facility
By this facility the policyholder obtains a right to decide to whom the
insurance amount be paid after his death. Hence, the nominee can
get the insurance amount very easily.
9. Provision of repaying debts
The loan borrowed for the purpose of constructing a house or some
other purpose would be burdensome for the dependents if a person
dies before repaying it. In such condition, he can select the amount
of insurance policy equal to loans and by pledging it as security with
insurance company / bank can reduce the burden of his
dependents.
B) From the Business Point of View
Life Insurance serves the business community, like the individual

persons, in a various way.
1. Business Continuation
Life Insurance helps the traders and business partners to avoid
possible interruption due to accident and death of one of partners /
proprietor or key men and continue their business or before. A sole
trader can leave sufficient funds for his business so that after his
death his heirs may continue his business without any anxiety.
In the same manner, at time of death of a partner, the firm has to
pay back his capital, share of goodwill, profit etc. By taking a joint
policy on lives of the partners, the problem is solved without putting
financial burden on the firm.
2. Insurance of key man
The existence of every business firm depends on some very
important persons, technicians, managers, executive directors, etc.
Such key-men are responsible, by virtue of their expertise, skill and
experience, for the prosperity and development of the firm.
Unfortunately, if such a key person dies, it disrupts the work or
sometimes the entire business may collapse. Insurance helps the
businessman to insure the lives of such key employees and avoid
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the risks. In case such key employee leaves the business firm, the
other able employee could be appointed out of the insurance
amount received from the company.
3. Employee Welfare Plans
The business firms have to discharge some responsibilities towards
their employees. For example, they have to pay compensation if
they met accidents while on work. These are integral parts of social
security and labour welfare. The employers can take advantage of
life insurance schemes. Usually, group insurance policies are taken,
by which the responsibility of paying compensation/other benefits to
the employees, is automatically transferred to the insurance
company. As the employees are covered under the policies from the
risks of death, illness, accident, etc, their sense of gratitude towards
the firm increases and they develop respect for it.
4. The Enhancement in Credit Worthiness
When the business firms purchase life insurance policies on the
lives of their key - employees, their credit worthiness in banks and
other finance institutes enhances. Because, in the event of the death
of such employees or their leaving the organizations, the financial
Institutes, banks etc. feel secure, due to the protection provided by
life insurance. It does not affect the stability or the economic
conditions of the organizations.
5. Facilitates Economic Growth
The role performed by life insurance in the economic growth of a
country has been extremely significant. By providing huge funds, the
life insurance companies can accelerate the process of economic
growth. The mobilization of huge resources and their investment in
various productive activities leads to industrialization, creation of
better infrastructure, provision of funds to companies in private
sector etc.
In addition to this, by buying shares and debentures of various
companies, the growth of share market also can be accomplished.
6. Social Security
The various schemes implemented by the life insurance companies
providing protection to weaker sections of the society, the artisans,
farmers, landless labours etc. takes care of some of the social
problems such as unemployment, old age, disability, premature
death and medical care for the aged. In the absence of life
insurance, the victims of these calamities would have become
burden on the society. Thus, life insurance helps maintain social
security and stability.
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6.3 ROLE OF LIFE INSURANCE
Insurance has evolved as a process of safeguarding the interest of
people from loss and uncertainty. It may be described as a social device
to reduce or eliminate risk of loss to life and property. Insurance
contributes a lot to the general economic growth of the society by
provides stability to the functioning of process. The insurance industries
develop financial institutions and reduce uncertainties by improving
financial resources.
The role and importance of insurance, here, has been discussed in three
phases: (i) uses to individual, (ii) uses to a special group of individuals,
viz., to business or industry, and (iii) uses to the society.
1) Provide safety and security
Insurance provides financial support and reduce uncertainties in
business and human life. It provides safety and security against
particular event. There is always a fear of sudden loss. Insurance
provides a cover against any sudden loss.
The insurance provides safety and security against the loss on a
particular event. In case of life insurance payment is made when
death occurs, or the term of insurance is expired. The loss to the
family at a premature death and payment in old age are adequately
provided by insurance. In other words, security against premature
death and old age sufferings are provided by life insurance.
For example, in case of life insurance financial assistance is
provided to the family of the insured on his death. In case of other
insurance security is provided against the loss due to fire, marine,
accidents etc.
2) Generates financial resources
Insurance generates funds by collecting premium. These funds are
invested in government securities and stock. These funds are
gainfully employed in industrial development of a country for
generating more funds and utilised for the economic development
of the country. Employment opportunities are increased by big
investments leading to capital formation.
3) Life insurance encourages savings
Insurance does not only protect against risks and uncertainties, but
also provides an investment channel too. Life insurance enables
systematic savings due to payment of regular premium. Life
insurance provides a mode of investment. It develops a habit of
saving money by paying premium. The insured get the lump sum
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amount at the maturity of the contract. Thus, life insurance
encourages savings.
4) Promotes economic growth
Insurance generates significant impact on the economy by
mobilizing domestic savings. Insurance turn accumulated capital
into productive investments. Insurance enables to mitigate loss,
financial stability and promotes trade and commerce activities those
results into economic growth and development. Thus, insurance
plays a crucial role in sustainable growth of an economy.
5) Medical support
A medical insurance considered essential in managing risk in
health. Anyone can be a victim of critical illness unexpectedly. And
rising medical expense is of great concern. Medical Insurance is
one of the insurance policies that cater for different type of health
risks. The insured gets a medical support in case of medical
insurance policy.
6) Spreading of risk
Insurance facilitates spreading of risk from the insured to the
insurer. The basic principle of Mix insurance is to spread risk
among a large number of people. A large number of persons get
insurance policies and pay premium to the insurer. Whenever a
loss occurs, it is compensated out of funds of the insurer.
7) Source of collecting funds
Large funds are collected by the way of premium. These funds are
utilised in the industrial development of a country, which
accelerates the economic growth. Employment opportunities are
increased by such big investments. Thus, insurance has become
an important source of capital formation.
6.4 FACTORS INFLUENCING DEMAND FOR INSURANCE
Life Insurance has become an increasingly important part of the financial
sector over the years, providing a range of financial services for
consumers and becoming a major source of investment in the capital
market. It provides individuals and the economy with several important
financial solutions. First, life insurance products encourage long-term
saving and reinvestment of substantial sum in public and private sector
projects. By leveraging their role as financial intermediaries, life insurers
have become a key source of long-term finance, encouraging
development of capital markets. Secondly, in the phase of growing
urbanization, population mobility, and formalization of economic
relationships between individuals, families, and communities, life
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insurance has taken on increasing importance as a way for individuals
and families to manage risk
A) Life Insurance Demand
It has been seen that there are very few variables, which were used to
measure the life insurance demand or consumption in an economy by
different researchers, such as life insurance penetration, life insurance
density, life insurance in force, life insurance premium volume, life
insurance in savings etc. Out of these, life insurance density and
penetration is being used internationally by IMF, World Bank etc to
measure the global insurance consumption.
1) Total Premium Volume: represents the total life insurance
premium written in a year in an economy. „Life Fund‟ as a proxy to
the total life insurance premium in India. Life Fund includes life
insurance fund of Life Insurance Corporation of India (LIC), postal
insurance fund of central government and state governments‟
insurance fund.
2) Life Insurance Penetration (LIP): defined as the ratio of premium
volume to GDP, measures insurance activity relative to the size of
the economy. It is a relative measure of life insurance sector‟s
contribution to the total economy. it as a measure of life insurance
consumption (demand). Since, penetration is the product of price
and quantity, it sometimes misleads in understanding the demand
or consumption pattern due to higher premium rates,
competitiveness of insurance market (due to lack of players), high
cost of writing of insurance policies due to governmental
regulations and differences in the price of different policies sold by
different insurers.
3) Life Insurance Density (LID): is defined as premiums per capita.
It is the ratio of gross premium volume to total population in a
country. This measure shows how much each inhabitant of a
country spends on insurance on average, expressed in
currency/Rupee terms. Although, both life insurance penetration
and life insurance density use gross premiums, important
differences remain between the two measures: life insurance
penetration measures life insurance consumption relative to the
size of the economy, whereas life insurance density compares life
insurance consumption across countries without adjusting for
income.
4) Life Insurance in Force (LIF): is equals the sum total of the face
amounts of life policies plus dividends. It measures the mortality
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risk along with savings. Thus, life insurance in force measures the
cash value of policies along with risk.
5) Life Insurance in Savings (LIS): Since, Life insurance policies are
financial products that offer two main services: income replacement
for premature death and a long-term saving instrument. So, the
proportion of life fund in the total savings would be an important
measure of insure demand in an economy.
b) Factors Affecting Insurance Demand
1) Income: Most of the research studies showed that there is a
positive relationship between the demand for insurance and
income of the consumer. As income increases, the need for life
insurance also increases to protect the principal wage earner for
the income flow in future and also to protect the dependants
against the loss of premature death
2) Inflation: Since, inflation works like a tax on the individual’s
income and reduced the real value of money. So, it has a
significant negative impact on demand for life insurance product.
The inflation and inflationary expectations have a negative impact
on the demand for life insurance.
3) Interest Rates: The findings on the relationship between the
interest rate and the demand for life insurance are indecisive. two
kinds of interest rates, the computing yield on savings products and
return yield by life insurance products. Since, the life insurance
products are long-term in nature and interest rate is an opportunity
cost for demanding insurance, we used long term deposit rate
(more than five years), dividend rates (UTI, IDBI) and govt. bond
rates (medium- and long-term bond) to assess the impact of
interest rates on life insurance demand.
4) Financial Development: Measuring financial development is a
very stiff task, as countries differ in their institutional structure and
the level of development of each country’s financial sector. Since,
India’s financial system is dominated by the size and spread of
Banks, so in the present study we use two proxies for financial
development, i.e., M3 to GDP ratio and total Bank credit to GDP
ratio.
5) Gross Domestic Savings (GDS): Since, India’s saving is sizable
per cent of GDP and also the peoples are more saving oriented. In
the total savings of the country, a major share is hold by the
household sectors. So, it is considered that savings habit of the
people has a major impact on the demand for life insurance
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6.5 PROCEDURE FOR TAKING A LIFE POLICY
A person who desires to affect a life insurance policy, must follow certain
procedure set by the life insurance company. Following are the various
stages of this procedure. Life policy is based on the principal utmost
good faith. The procedure-filling in the form is quite simple. It is almost
like a home industry where the person who wishes to make an
investment in the form of insurance. The first thing to do is to fill in a
proposal form.
1. Procedure for taking a life policy
The proposal form contains the following details:
1) Name, nationality, permanent residential address, occupation,
nature of duties, present employer’s name, length of service,
previous employment record, father’s name in full.
2) Place of birth, date of birth, proof of age and district of birth.
3) Term of insurance, nature of insurance, type of policy, amount to
be insured, mode of premium payable — yearly, half-yearly,
quarterly and monthly.
4) Personal information regarding height, weight where the life is
proposed.
5) Details of any previous policies whether one or double insurance.
6) Family history, history of father, mother, brothers, sisters,
children.
7) Information regarding diseases like epileptics, asthma,
tuberculosis, cancer, leprosy, etc.
8) Information regarding previous records of accident, injury,
operation diseases.
2. Medical Examination
If the applicant has a family history of disease, then the investment
procedure is more detailed and description about permanent immunity
and other family diseases have to be given including habits, name,
income, occupation and salary. A person of normal health almost goes
through a medical examination as a matter of formality.
3. Medical Report
The next step after filling-in proposal form is to undergo a medical
examination from one of the doctors approved by the Life Insurance
Corporation.
The examination is usually of a routine kind where the identification of

the applicant, his appearance, measurement, weight, condition of teeth,
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eyes, throat, tongue, ears, condition of heart, chest, digestion, nerve
system and past operation is taken into consideration to find out the life
span of the individual.
4. Agent’s Report
The third step consists of a report which is confidential in nature. It is
made by the agent who is underwriting the life of the person. His report
consists of the age of the person insuring himself, his health, occupation,
soundness of payment of premium, proper health and longevity of life.
5. Acceptance of Proposal
The Life Insurance Corporation accepts the proposal of the insurer on

the commitment made by the agent and after taking into consideration
the doctor’s medical report. The factors which play a dominating role is
the mode of premium, type of policy, the age of the applicant, his health,
occupation and habits.
Once these factors have been considered and the Life Insurance
Corporation’s officers are satisfied, the form is accepted. An investor’s
form will be rejected only if he suffers from serious diseases or the
longevity of life cannot be guaranteed.
6. Proof of Age
The next step after accepting the proposal of a person is to ask him to
submit the proof the age.
The person who is interested in insuring himself may give this proof by
submitting any of the following documents:
a. A copy of a certificate giving details of the school leaving
examination with age or date of birth stated therein;
b. Municipal records;
c. Original horoscope prepared at the time of birth, if no proof of age
is available;
d. In the case of uneducated families, entry in the family record
through birth register;
e. Employer’s Certificate’
f. Any other satisfactory proof.
7. Mode of Premium
When an investor takes a life policy on his portfolio, he must pay some
installment to the life insurance company for this investment. This
installment is called premium and may be paid periodically.
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It may be paid annually, half-yearly, quarterly or monthly. Usually, a
period of 30 days is given as grace beyond the due date of payment of
premium. The rates of premium are different for different kinds of
policies offered as investment.
8. Issue of Policy
When all these formalities are completed the Life Insurance Corporation
sends a life policy to the insured. This legal document between the life
company and the insured states the details of the policy.
It gives details regarding the age, address, sum assured, type of policy
with or without profits, date of maturity, premium, mode of payment of
premium, name of person who is entitled to receive the ultimate sum,
amount at the termination of the policy, the surrender value of the policy,
the settlement of claims of policy and all other conditions of the contract
LET US SUM UP
The life Insurance is associated with man's life. By life insurance
contract, the insured is entitled to obtain the sum assured after the
specific term or if he dies before that, his dependents obtain it. Hence,
after his death, his dependent family receives a financial security. If he
survives after the maturity of the policy, he is at the advantage in old
age, children's education, marriages etc. By paying some extra
premiums, he can avail of the extra benefits like accident benefit etc.
Due to this, the scope of life insurance widens.
CHECK YOUR PROGRESS
1) __________________represents the total life insurance premium
written in a year in an economy
a) Life insurance
b) Total Premium Volume
c) Life Insurance Penetration (LIP)
d) Life Insurance in Force (LIF)
2) __________is equals the sum total of the face amounts of life policies
plus dividends.
a) Life insurance
b) Total Premium Volume

c) Life Insurance Penetration (LIP)
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d) Life Insurance in Force (LIF)
3) When an investor takes a life policy on his portfolio, he must pay
some installment to the life insurance company for this investment. This
installment is called
a) Life Insurance Demand
b) Tax Relief
c) Mode of Premium
d) Life insurance
4) The business firms have to discharge some responsibilities towards
their employees is called
a) Tax Relief
b) Life Insurance in Force (LIF)
c) Total Premium Volume
d) Employee Welfare plans
5) The proposal of the insurer on the commitment made by the agent
and after taking into consideration the doctor’s medical report is called
a) Issue of Policy
b) Acceptance of Proposal
c) Life Insurance in Savings (LIS)
d) Life insurance
GLOSSARY
Life insurance : Life insurance is an insurance on human

Life. Man's life being uncertain, he is
prone to meet immature death, accident,
disability, old age etc.
Total Premium Volume : represents the total life insurance

premium written in a year in an
economy. „Life Fund‟ as a proxy to the
total life insurance premium in India.
Life Insurance : defined as the ratio of premium volume

Penetration (LIP) to GDP, measures insurance activity
relative to the size of the economy. It is a
relative measure of life insurance sectors
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contribution to the total economy. it as a
measure of life insurance consumption
(demand).
Life Insurance in Force : is equals the sum total of the face

(LIF) amounts of life policies plus dividends. It
measures the mortality risk along with
savings.
SUGGESTED READING
Limited
Limited
WEB RESOURCES
1. WHAT IS LIFE INSURANCE IN TAMIL| TERM INSURANCE

FOR BEGINNERS| FINANCE FRIDAY 25 | almost everything -
YouTube
2. Insurance in Tamil | Types of Insurance in Tamil - Part A | Sana
Ram - Bing video
3. Life insurance advisor Sridhar explains the importance of
insurance | Varaverpparai | News7 Tamil - Bing video
1. b) 2.b) 3.c) 4. a) 5. b)
91
UNIT 7
PREMIUM POLICY AND MODE

OF PAYMENT
STRUCTURE
Overview
Learning Objectives
7.1 Life Insurance Premium
7.2 Calculation of Life Insurance Premium
7.3 Types of Insurance Premiums

7.4 Modes of Paying your Premiums
7.5 Payment of First Premium
7.6 Life Insurance Renewal
7.6.1 Keep in Mind About Renewal of Life Insurance Policy
7.7 Mode of Premium Payment
7.7.1 Online Modes of Premium Payment
7.7.2 Offline Modes of Premium Payment
7.8 Limited Premium Payment
7.9 Single Premium Life Insurance

7.9.1 Pros and cons of single premium life insurance
7.9.2 Difference between single premium and limited
premium
7.10 Lapsed Policy
7.11 Revive A Lapsed Life Insurance Policy
Let us sum up
Check your progress
Glossary
Suggested readings
92
OVERVIEW
Life insurance is a whole new world of terminologies and verbiage we
hardly get to hear in our everyday lives. When buying a life insurance
policy, words like beneficiary, premiums, riders and underwriting come
up frequently and start running together only in a short while. A life
insurance premium is defined as the amount of money an individual
pays for a life insurance policy. Simply put, “premium” means payment.
LEARNING OBJECTIVES
• tell about the Life insurance premium, types of LI premium and

its calculation
• illustrate the payment of first premium, renewal, policy lapse and
different mode of the premium payment.
• explain the concept of revival, mode of premium payment and
revive of lapsed LI policy
7.1 LIFE INSURANCE PREMIUM
A life insurance premium is a payment made to the life insurance
company, to pay for a life insurance policy. One way to look at the
premium payment is as the cost of the life insurance, but the cost of
insurance and the premium due are not always the same amount due to
things like dividends.
Premium payments are required to be made to the insurance company
for a life insurance policy, otherwise, the policy will lapse. Sometimes the
premium payment is more than the minimum required to keep the life
insurance. Different types of policies have very different costs, and
permanent life insurance has higher premium payments than term life
insurance. Payments for a policy can also vary in structure. For instance,
some policies only have one payment, some are structured to have
payments last for a few years, universal type policies have flexible timing
and dollar amount of premiums, or some policies have a level premium
for the entire policy duration.
7.2 CALCULATION OF LIFE INSURANCE PREMIUM
Premiums are calculated differently depending upon the policy type and
the features and goals of the policy, but at a basic level premium are
calculated on a few factors. These factors include the age of the insured
person, the health rating of the insured person, the length of the policy
and type of life insurance, and the face amount of the policy (amount of
insurance).
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1) Age
The older the age of the insured person, the more expensive the
insurance will be. Life insurance companies consider your half
birthday when calculating your age because they round to the
nearest age. So, if you are 32 and 6 months old, you will be
considered 33 for the purposes of the policy age. As people get past
the age of 50, life insurance premiums will typically go up in an
accelerating way for each additional year of age.
2) Health Rating
Life insurance companies assign a health rating to each individual
so that they can group them in a way that creates a pool of people
with roughly the same risk of dying. The health rating determines the
cost of insurance because a worse health rating represents a
greater mortality risk, and therefore a greater risk that the life
insurance company will need to pay a claim.
3) Length of Coverage or Type of Policy
The length of the policy matters when the policy is term life
insurance. This is because the longer the life insurance company is
guaranteeing coverage, the higher the risk to them that they will
need to pay out a claim. This is especially true for policies that
expire when the insured person is older than 70. The type of life
insurance matters because permanent forms of life insurance such
as whole life insurance will always pay out a claim (as long as the
owner makes the premium payments). So permanent life insurance
is quite a bit more expensive than term life insurance, in terms of the
annual premium due. Over time, permanent life insurance can
actually be less expensive than term because dividends and cash
value can grow in the policy and be used to pay the premiums.
4) Face Amount
The face amount matters because the more coverage the life
insurance policy provides the higher the risk to the life insurance
company. Premiums go up proportionally with each additional dollar
of coverage assuming the other factors are the same.
Ultimately, the life insurance company is calculating the risk that any
policy is going to ultimately payout, and how much they owe if the
insured person dies. The higher the risk to the company, the higher the
premiums will be.
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7.3 TYPES OF INSURANCE PREMIUMS
A) Based upon the premium paid
While purchasing an insurance for whatever purpose, you get a choice
for whether you want to pay a fixed premium till the end of your policy’s
maturity period or you want some flexibility. Based on this, the following
are the two types of insurance premiums.
1) Level Premium
This is the basic form of premium where the policyholder has to
make fixed payments till the end of policy maturity period. There is
nothing much in this to learn.
2) Flexible Premium
This is where it gets a bit complicated. If you choose flexible
premiums, then you get the option to make certain changes in your
insurance policy in the future like you can change the face amount to
increase the number of people covered under a term insurance plan
or you can increase the sum assured. According to the changes
made in the policy, changes in the premium amount to be paid will
get implemented.
B) Based upon the insurance purchased
One might assume that this section is going to include different types of
insurance, and nothing related to premium. Well, it could have been
done that way but to keep the relevance to the topic preserved, under
insurances, we’ll list out the prominent factors that determine the
premiums. So, let’s get started:
Life Insurance premiums
Online life insurance offers cover against the death of the policyholder or
any mishap to the family of the policyholder along with some saving
benefits depending upon the type of life insurance chosen. The factors
that affect the premiums paid for life insurance include the age of the
insured, his annual income, assets owned, debts, health information etc.
the simplest form of life insurance is the term insurance plans because it
doesn’t include any saving benefit at all and provide cover for only the
policy duration.
1) Health Insurance Premiums
Health insurance provides cover for the medical expenses,
hospitalization, illness treatment, surgeries of the insured. It even
includes regular free medical checkups. Now the factors to be
considered under this insurance are pretty simple and all of them
arise out of just one number that is your age. Higher is your age,
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more will the premium to be paid for the health plan. other factors
that are important are pre-existing health conditions, family size if
you are looking for a floater plan, income and the type of coverage.
2) Car insurance premiums
Car insurance is broadly of two types third-party and comprehensive.
Third party car insurance is the basic form and is mandatory to have
while the comprehensive insurance provides coverage to you and
your car. Your car model, daily commute, car condition, age of the
driver, Anti-theft gadgets installed in your car or not etc. one thing to
keep in mind while buying a car insurance is that both the types of
car insurance are important where the third party is necessary to
provide you cover against an accident or damage to the third party
and the comprehensive insurance provides cover for the damage to
you and your car maintenance.
3) Travel Insurance premiums
Travel insurance provides you benefits of both the health insurance
and life insurance but only when you are traveling. The factors to be
considered in this case thus would be a combination of both these
insurance including others like the place of travel i.e. abroad or
domestic, cover to be provided, type of coverage etc.
7.4 MODES OF PAYING YOUR PREMIUMS
Payment of insurance premiums can be made in various modes and by

the way, Mode indicates the frequency of paying the insurance premium
in a year. let us look at all the different modes of payment below:
1) Monthly
For monthly premiums, the amount would be least and easy to afford
on monthly basis but the downside with monthly premiums is that the
insurance policy would cost you most this way.
2) Quarterly
Four payment per year, the amounts are quite affordable and the
policy, in the end, would cost you lesser than the case of monthly
premiums but more than the cases of both semi-annual and annual
payment methods.
3) Semi-Annually
In this case, two payments will be made for premiums in a year and
the cost would be more than paying annually but way less than if you
go for monthly premiums. Also, the amount to be paid will be higher
than both quarterly and monthly payments.
4) Annually
Under Annual payment of premiums, you would be paying only once
a year but the amount would be significantly high than like monthly or
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quarterly payment but at the same time, the cost of the policy to the
owner would be least.
So, the trend can be easily observed that higher the frequency of
your premium payments, more is the cost of policy but the lesser is
the amount to be paid in one installment.
7.5 PAYMENT OF FIRST PREMIUM
As consideration of insurance contract, the first premium is to pay.
Afterwards, the regular payment of the premium before due date or
within the grace period is to be made for the continuation of the policy.
Paying premium in time is the duty of the policyholder. The Insurance
Company does not need to intimate him in this regard. Yet, the
companies send the policyholder a notice, before hand in writing. The
premium can be paid in one lump-sum, yearly, half yearly, quarterly or
monthly. As well, the premium can be deducted from the salaries.
Concession to some extent can be obtained if the premium is paid
yearly, half yearly. In the same way, if the sum assured is a large one,
some concession in premium is granted. Generally, the premium is to be
paid at the branch where the policy is taken from, either in cash or by
cheque. It could be paid to the agent also. At present, due to internet
facility, some Insurance companies allow to pay the premium at any
branch of the company.
First premium payment may be made when your policy is issued and
accepted. Future Payments After your initial premium is made, future
payments will be based upon your desired payment options including:
monthly, quarterly, semi-annually and annually. If you choose monthly
payments, this option requires EFT automatic bank withdrawals
Timing for your first premium payment depends upon your specific
needs. If you require temporary and conditional coverage during the time
your policy is being underwritten,
However, we do not require a premium payment to be made at the time
of application if you prefer not to take advantage of the temporary and
conditional coverage during the underwriting process. Your first premium
payment may be made when your policy is issued and accepted.
7.6 LIFE INSURANCE RENEWAL
Since life is full of unknown factors, one of the most critical worries is
safeguarding your loved ones when you are away. You can never be
completely prepared for the future, no matter how much planning you do
or how many precautions you take. Life insurance plans, on the other
hand, provide you with the assurance that your family will be financially
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secure in the event of your death/absence, irrespective of the reason.
The best aspect is that a term insurance plan in India can be used to
provide financial security for your family without breaking your bank.
However, simply purchasing a term plan is insufficient. To keep the plan
active, you must pay all of your premiums on time. The term insurance
coverage may lapse if premiums are not paid. If your insurance policy
expires, it is critical that you renew your term insurance coverage
promptly to ensure that your family’s financial security is not jeopardised.
If you have an existing term plan that is about to expire, let’s have a look
at the guide to understanding its importance, tips to renew your existing
and lapsed policy, and other factors to keep in mind.
Renewing your insurance policy isn’t as complicated these days, but of
course it is an added hassle that you would have been able to avoid if
you had paid your premiums on time. Or if the policy requires annual
renewal, chances are that your insurer will inform you two weeks prior to
when the policy is expiring.
If you want to continue being insured under the policy, you can simply
keep paying your premiums. If you don’t want to, you have the option of
surrendering your policy altogether, of course that way you will be
required to pay a fee.
But a lapse in policy isn’t the only reason you get it renewed. There are
certain times when you would want to renew a policy:
• Change in address: It is important for you to ask your insurer if
the change in address would affect your premiums because
sometimes geography does matter when it comes to the kind of
policy plan and the premiums that were initially decided on the
policy.
• Change in marital status: You might want to get your spouse
insured now, and maybe your insurer could give you a discount
on your existing policy if your spouse were to also get insured
from the same company.
• Change in car insurance: If you have recently started using your
car for commercial purposes like deliveries or driving an Uber,
you will be insured under commercial auto insurance which will
change the premiums you paid initially.
• At the end of the financial year: Like i mentioned above, most
insurance policies do need renewal after the end of the year and
could include a renewal fee and higher premiums.
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Like a responsible citizen, you should be informing your insurance
company for any of these changes. Policies can be renewed by
either writing an insurance renewal letter or calling the company’s
helpline.
7.6.1 Keep in Mind About Renewal of Life Insurance Policy
Here’s the list of the aspects that you must adhere to while renewing
your life insurance plan.
• The Necessity of Renewing Life Insurance- The main goal of
your life insurance policy is to provide a safety net for you and
your family in the event of an unexpected event. Certain life
insurance policies are only active for a specific amount of time. It
makes sense to renew your insurance at the end of this period,
whether or not you receive a payout if you outlive that period.
You will be uninsured for the rest of your life if you do not apply
for renewal, and your family will be financially insecure. If
insurance isn’t renewed, the whole point of it is lost.
• Recognize the Claim Evaluation Procedure – Now that you’ve
finished a term and are ready to renew, it’s time to learn about
the claim process. You can do so by contacting your insurance
provider directly, who will advise you on the appropriate
paperwork. It’s also crucial to understand the claim settlement
ratio, which you can get from relatives, friends, prior
beneficiaries, or even a licensed agent.
• Prioritise Grace Period: You can and should apply for renewal in
one of two situations. Either your coverage expires, or the period
of your policy expires. In any situation, you’ll normally have a
certain amount of time from the date of lapse or maturity to file
for policy renewal. This is known as the “Grace Period”. In the
event of a lapse, you have a certain amount of time to pay your
past-due premiums, plus applicable interest and penalties, and
renew your policy. This grace period varies from one insurer to
the next.
• Revaluate the frequency with which you pay premiums -Life
insurance companies allow you to pay your premiums in a
variety of ways, and it’s fascinating to learn how you might save
money with different techniques. If you got a raise or a promotion
at work, or your firm generated money, try making annual
payments rather than monthly instalments. This will not only
provide you with peace of mind, but it may also result in
significant renewal reductions.
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• Medical Advice: Your insurer will determine whether you need a
fresh medical test report to renew your life insurance. Your
medical issues may change as time passes and you become
older. As your mortality risk rises, insurers may request a new
medical examination. You might not need a new test if your
policy has a built-in option for renewal. If you are a non-smoker
with no major health conditions, you may be eligible for a much
cheaper renewal price.
• Examine your insurance coverage in light of inflation– Before
renewing your term plan, you should think about the country’s
economic situation. As a result, it’s critical to forecasting the
amount of money needed to fulfil a specific goal (Say ten years
down the line). As a result, adjusting the goal calculators is the
best approach. If you’re not sure how much life insurance you
need, write down your annual salary and multiply it by ten. For
example, if you earn Rs.5 lakhs per year, your insurance
coverage would be Rs.50 lakhs.
7.7 MODE OF PREMIUM PAYMENT
In today's fast-paced lifestyle, securing yourself and your family with

adequate Life Insurance is necessary. It is the ultimate solution that
ensures your family is financially secured in case of an unfortunate
demise of the insured. Life Insurance is a contract between an insurer
and a policyholder. An insurer guarantees a sum assured to the
beneficiary/nominee on the policyholder's unfortunate demise in return
for the premiums paid. In simple words, Life Insurance provides financial
security to your family so that they continue living the same lifestyle
without any compromises due to the financial instability caused due to
the loss of an earning member. To ensure you continue enjoying your
life cover without any interruption, it is necessary to renew the policy on
time. If you already have a Life Insurance Policy due for renewal or you
missed the policy renewal date, read this article to know how you can
renew your Life Insurance Policy.
To keep the Life Insurance Policy active and continue enjoying the life
cover and other benefits, you are required to renew the policy at the end
of the term by paying the premium. Earlier, we had to contact our life
insurance agent to renew the policy. But, nowadays, insurance
companies offer several other convenient options to renew the Life
Insurance Policy online as well as offline.
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Different Modes of Premium Payment and Policy Renewal
7.6.1 Online Modes of Premium Payment
Most insurers nowadays offer the facility to pay the premiums and renew
the policy online from the comfort of your home. There are several ways
to make an online premium payment. Here are some commonly used
online modes of premium payment:
a) Through Company's Website:
You can pay the premium and renew your Life Insurance Policy within
a few minutes by visiting the company's official website. It is the most
popular mode of premium payment as you can simply login into your
online account and choose the payment mode of your choice, such
as internet banking, UPI, debit card, credit card, credit card EMIs, e-
Wallets, etc. Many insurers let you pay the premium even without
logging into your account. All you have to do is choose the 'Pay
Premium Now' option from the website, enter your policy number,
registered mobile number, and date of birth, and click on 'Submit'.
Upon successful payment, your policy will get renewed.
b) Through Internet Banking
If you have bought the policy from your bank that offers an internet
banking facility, you will be able to check the status of your policy and
make policy-related transactions in a few clicks. Click on the
'Insurance' tab on your internet banking and choose the 'Pay
Premium' option. However, if your Life Insurance Policy is not linked
to your bank, you can still pay the premium through RTGS or NEFT
facility by entering the bank details of the insurer.
c) Through Foreign Remittance
If you are an NRI or moved abroad temporarily, you can use the
internet banking facility of your international bank to pay the premium
of your policy. Otherwise, you can visit the branch of your
international bank and request a forex payment or wire transfer. To
make the premium payment offline, you will need a few details of the
insurer's bank account, such as the Swift Code of the beneficiary
bank, details of the intermediary bank, the beneficiary's bank branch
address, insurer's address, etc. These details can be easily availed
by visiting the insurer's website or calling their customer service.
d) Through E-Wallets
Most recognised e-Wallets like GooglePay, PayTM, PhonePay, etc.,
allow you to pay the insurance policy premiums of recognised
insurers. When making the payment, you need to mention your policy
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number and date of birth. The payment can be made through wallet
balance or using the UPI facility.
7.7.2 Offline Modes of Premium Payment
a) Premium Payment through Phone
Many insurers allow their customers to pay the policy premium
through their phones by calling the IVR number. You can find the
insurer's IVR number on their website or on the policy document.
Generally, the IVR number is available 24*7 in English, Hindi, and
other regional languages.
b) Auto-debit Facility
While purchasing the policy, insurers advise on registering for an
auto-debit facility to ensure you do not miss the payment due date.
The auto-debit facility allows you to register your bank account, credit
card, or any other payment method to deduct the premium on the
due date automatically. You can provide standing instruction to your
credit card or ECS mandate to your bank account. However, if there
is an insufficient balance in your registered account on the due date
and the payment is unsuccessful, you will be charged for the same
by your bank.
c) Payment by Visiting the Nearest Branch
You can visit the nearest branch of the insurer to deposit cash,
cheque, or demand draft. You can also make the payment through a
debit or credit card. This option could be helpful if the branch is at a
convenient location for you.
d) Payment through Affiliated Bank
Insurance companies have tie-ups with several banks through which
you can pay your Life Insurance Policy premium. You can choose
from any of the available modes of payment, such as cash, cheque,
cards, etc.
e) Fund Transfer through Any Bank
If your preferred bank does not have a tie-up with the insurer, you
can visit the bank where you have your Savings Bank Account or
Current Account and pay the premium through RTGS or NEFT. For
Fund Transfer through RTGS/NEFT, you will need certain bank
details like bank account number, IFSC, insurer's bank branch, etc.,
which can be availed from the insurer's website or by contacting the
customer service.
f) Cheque Pick-up
Many insurance companies provide the facility of doorstep cheque
pick-up for policy renewal. You can place the request for cheque
pick-up by contacting the insurer's customer service number and
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book a convenient slot at your convenience. The insurance company
representative will visit you on your preferred day and time, and you
can hand over the cheque to him/her. However, most insurers
provide this facility to certain locations only. You can check whether
the facility is available in your city by visiting the company's website.
7.8 LIMITED PREMIUM PAYMENT
In a limited premium payment term insurance policy, the premium
payment term is always lower than the policy term. Therefore, this
means that you will not have to pay premiums for the entire duration of
the policy. However, you will continue to enjoy the benefits of the life
cover until the end of the policy term.
Here is an example that can help you understand what a limited
premium payment term insurance plan is –
Let’s say, as we saw in the earlier example, that you opt for a term life
insurance plan that offers you a life cover for a period of 30 years.
However, you are required to pay a premium of Rs. 20,000 per year for
the cover, only for a period of 10 years instead of for the full tenure of 30
years. Therefore, here, the policy term is 30 years, while the premium
paying term is shorter, since the premiums are only due for 10 years.
These plans are referred to as limited premium payment term insurance
plans.
Benefits of limited premium payment

There are many terms insurance plans in India that offer you the option
to pay your premium for a limited period. This can be advantageous in
many ways –
• Your financial burden is reduced since you do not need to pay
premiums for extended periods.
• Since the premium payment period is limited, the chances of you
missing a payment are also reduced. This minimizes the
chances of policy lapses.
• In case you are self-employed, or you do not want to commit to a
longer tenure, limited premium payment term plans are the
perfect option
7.9 SINGLE PREMIUM LIFE INSURANCE
Single premium life insurance (SPL) is a type of policy that can be fully
funded in a single payment. In return, you receive a death benefit that is
guaranteed until you die. A single premium policy is a form of permanent
life insurance with a cash value that grows over time and can be
borrowed against.
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Due to the large premium payment, all single premium policies are
considered modified endowment contracts (MECs), which have their
own tax characteristics.
Single premium life insurance is a form of life insurance that's paid with
one upfront lump-sum premium. Once you've purchased a single
premium policy, you would receive a permanent death benefit that
extends until you die.
This differs from other life policies, such as whole life insurance, where
premiums can be paid on a monthly or annual basis. It also differs from
term life insurance in that coverage is permanent, whereas a term policy
only extends coverage for a set period of time, such as 20 years. For
example, a term policy could have annual premiums of $500 for the
entire length of the policy. On the other hand, a single premium policy
could have one $25,000 premium at the start and no additional
payments for the rest of the policy life.
The size of the death benefit of a single premium life insurance policy
will depend on the amount of money initially invested and the age and
health of the insured. For example, a 30-year-old in good health could
invest $50,000 in a single premium life insurance product and receive a
death benefit of $250,000. On the other hand, a 60-year-old with similar
health could invest $50,000 and may instead receive a death benefit of
$125,000.
Modified Endowment Contract (MEC)
A modified endowment contract is a type of life insurance tax
qualification. It’s when a policy has been funded more cash that the
federal tax laws allow. When a life insurance policy has become a MEC
— it is no longer viewed as life insurance by the IRS. The IRS then
considers it a modified endowment contract. Once your life insurance
policy is viewed as a modified endowment contract, it can no longer be
reclassified as a traditional life insurance contract.
7.9.1. Pros and cons of single premium life insurance
Single premium life has benefits and downsides that must be considered
before deciding if this is the right policy for you.
There are many benefits of single premium life insurance
1. Single Premium
This may see obvious considering it’s called single premium life
insurance. With a single payment – you’ll never have to worry about
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another future premium payment. Your death benefit will be guaranteed
immediately. What a relief!
2. Accelerated Death Benefit
There are many single-premium life insurance policies that provide an
accelerated death benefit. This life insurance rider allows you early
access to your death benefit if you’re diagnosed with a terminal illness.
3. Cash Value
Your policy will grow cash value over time. With single premium life
insurance – the cash value grows quicker compared to a traditional
whole life policy that is paid monthly or annually. Cons:
There are definite disadvantages to single premium life insurance.
1. Price
It’s pretty obvious that a single premium life insurance policy comes with
a hefty price tag. For most people, an SPL is simply unaffordable.
However, if you can afford an SPL, it provides great savings over the life
of your policy.
2. Underwriting
If you decide to apply for a single-premium life insurance policy, you’re
going to have to take a medical exam. SPL policies are fully underwritten
life insurance policies. This means you’ll have to schedule and complete
a medical exam that the company pays for. It’s similar to an annual
physical where you provide a urine sample and blood test. If you don’t
hate needles, this isn’t that big of a deal.
3. Potential Taxes and Losses
Permanent life insurance policies sometimes come with an investment
risk. The money that grows in your policy is not taxed. However, the
profits can be when you withdraw money before you pass away.
4. MEC (Modified Endowment Contract)
One of the biggest things we hate about single premium life insurance
policies is that they’re considered a MEC. A modified endowment
contract has some downsides like taxes for policy loans or withdrawals.
If you’re thinking of an SPL for short term cash value growth, you may
want to consider another policy. Let’s dive a little deeper into the MEC.
7.9.2 Difference between single premium and limited premium
Under a single premium plan, you need to pay premium just once. For
instance, you pay premium once and get life coverage for 10 years.
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Under regular premium payment plan, premium payment term and the
policy term is same. i.e., you pay premium for 15 years and get
coverage for 15 years. Under a limited premium payment plan, premium
payment term is less than the policy term. For example, you pay
premium for 10 years while the life cover is for 15 years. Limited
premium payment plans are not very common for term insurance plans
but are quite common in traditional life insurance plans and ULIPs. If
you feel you may not remember to pay premium next year, then you
can go for a single premium option.
7.10 LAPSED POLICY
If the life assured does not pay the premium amount during the grace
period or even after the grace period, the life insurance will lapse. At this
stage, the life assured will not be able to enjoy coverage benefits
available under the life insurance policy and will also not be eligible to
receive any death benefit. There is a way to sort this out which is
Revival/Reinstatement of the life insurance policy in the given time
period.
Mostly, life insurance policies have a revival period under which the life
insured can choose to revive his/her lapsed life insurance policy.
7.11 REVIVE A LAPSED LIFE INSURANCE POLICY
You can revive your lapsed life insurance within the revival time period
provided by the life insurance policy. The process to renew your life
insurance policy is as mentioned below:
• Revival within 6 months from the date of policy lapse: If you
want to apply to revive your life insurance policy within 6 months
from the date it got lapsed, the process will be simple. You can
easily revive your life insurance policy by contacting the insurance
provider and making the overdue premium payments with interest.
You can also choose to revive your life insurance policy from the
official website of your life insurance provider.
• Revival after 6 months from the date of policy lapse: In case it
has been more than 6 months from the date when your life
insurance policy lapses, you apply for revival and pay the overdue
premiums along with interest which is fixed by the insurance
provider. Penalty shall also be levied depending on the terms and
conditions of the insurance provider. In some cases, the revival of
your life insurance policy depends on the discretion of the
insurance company. The insurance company can increase the
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premium or ask you to undergo medical tests in order to assess
your present health condition.
To revive the life insurance policy, the life insured will have to submit the
proof of continued insurability along with supporting documents that vary
from one insurance provider to another. The due premium payment will
be made along with applicable charges that depend on the insurance
providers. The insurance company can also ask the life assured to
undergo a medical examination at the time of renewal.
LET US SUM UP
A life insurance premium is a payment made to the life insurance
company, to pay for a life insurance policy. One way to look at the
premium payment is as the cost of the life insurance, but the cost of
insurance and the premium due are not always the same amount due to
things like dividends.
Premium payments are required to be made to the insurance company
for a life insurance policy, otherwise, the policy will lapse. Sometimes the
premium payment is more than the minimum required to keep the life
insurance. Different types of policies have very different costs, and
permanent life insurance has higher premium payments than term life
insurance.
CHECK YOUR PROGRESS
1. _____are the life insurance plans that pay a lump sum to the
dependents of life assured.
a) protection plan b) retirement plan
c) unit linked plan d) whole life insurance
2. Retirement plan is also known as ______.
a) group insurance b) pension plans
c) term life insurance d) endowment plan
3. Level premium covers for a specified period ranging from _____.
a) 10 to 30 years b) 5 to 10 years
c) 10 to 20 years d) 10 to 35 years
4. ______is a form of permanent life insurance that insures the life of a
minor.
a) child life insurance b) money back insurance
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c) endowment plan d) retirement plan
5. ______ is the planning that one does to be prepared for life after paid
work ends, not just financially but in all aspects of life.
a) retirement planning b) endowment planning
c) money back plans d) term life insurance
6. The single insurance endowment plan is a one - time payment
insurance policy that premium payment is called as
a) Regular premium b) Limited premium
c) Single premium d) Both (a) and (b)
GLOSSARY
Investment : It is a Unit-Linked Insurance Plan or ULIP that

plan combines the benefits of investments and a life
cover under a single plan.
Term life : It is also known as pure life insurance, is a type

insurance, of life insurance that guarantees payment of a
stated death benefit if the covered person dies
during a specified term
Whole life : It is one type of the permanent life insurance

insurance
policies
group : It is essentially a health/medical insurance plan

insurance that cover all the members of a particular group
scheme
Life insurance : It is a product that guarantees a death benefit – a

products payment to your beneficiaries in the event of your
death
SUGGESTED READINGS
Limited
2. George E. Rejda: Principles of Risk Management and
Insurance
3. M. N. Srinivasan: Principles of Insurance Law, Wadhwa &
Co.
108
4. Rajiv Jain: Insurance Law and Practice, Vidhi Publication
Private Limited
WEB RESOURCES
1. IPPB to Postal Life Insurance premium payment online tamil,PLI
payment ஆன்லைனிை் செலுத்துவது எப் படி - Bing video
2. What is a Premium Payment Mode? |Educational Series | Kotak
Life - Bing video
3. New Term life insurance | Max life insurance Secure smart plus
in Tamil | NIVAS NARASIMHAN - YouTube
1 .a) 2 .b) 3 .a) 4.a) 5,a)
6 .c)
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UNIT 8
REVIVAL, BONUS AND SURRENDER
VALUE
STRUCTURE
Overview
Learning Objectives
8.1 Renewal & Revival

8.2 Types of Revival schemes
8.2.1 Ordinary Revival Scheme
8.2.2 Special Revival Scheme
8.2.3 Loan-cum-Revival Scheme
8.2.4 Survival Benefit cum Revival Scheme
8.2.5 Revival by Installment Method

8.3. Paid Up Policy
8.4 Deferment period
8.5 Nomination & Assignment of Policy

8.6 Difference between Nomination and assignment
8.7 Meaning of Bonus in Insurance
8.8 Types of bonuses in insurance
8.9 Surrender Value
8.10 Kinds of life insurance have cash surrender values
8.10.1 Universal life insurance
8.10.2 Whole life insurance
Let us sum up
Check your progress
Glossary
Suggested readings
110
OVERVIEW
A mishap or eventuality can happen to any person and at any time,
therefore getting oneself insured under a life insurance plan is a must in
order to deal with the unfortunate life events. It is the ideal way to secure
the future of your dear ones even after your death. Apart from buying a
life insurance plan, one must also remember to renew the insurance
plan timely alongside revival of the lapsed insurance plan. t is an amount
which gets accumulated under the policy on a yearly basis, and it is
payable on the death of the life assured, surrender or at maturity of the
plan, whichever occurs earlier. This bonus amount is payable over &
above the benefits applicable under a life insurance policy.A life
insurance surrender is a full cancellation of a life insurance policy,
usually for the cash surrender value. You are allowed to surrender your
policy at any time, though charges may apply during the initial policy
years.
LEARNING OBJECTIVES
• describe the concept of Renewal of insurance policy and
revival and it various schemes
• explain the concept of paid-up policy, deferment period,
Nomination and assignment differences group term insurance
• comprehend about providing bonus and its various types of
bonuses, procedure for surrender values of life insurance
8.1 RENEWAL & REVIVAL
A life insurance policy comes into force when the customer pays the
First Premium installment, and the Receipt (FPR) is issued by LIC. As
per the terms and conditions of the contract, for continuing the benefits
such as life cover and rider benefits, a policy holder is supposed to pay
the subsequent due premiums until claim. Failure to do so causes the
policy to lapse after the grace period.
Renewal: If premium is paid within grace period it is called renewal.
Various online and offline methods are available to pay the renewal
premium, which we are going to discuss shortly.
Revival: If premium is not paid within grace period, policy lapses.
However, policy can be revived on payment of all unpaid premiums
along with interest thereon and satisfactory proof of good health subject
to revival terms and conditions as applicable from time to time.
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Policy can also be revived by
1. Raising Loan Under the Policy – If It Is Eligible For Loan OR
2. Adjusting Survival Benefit Payable Under the Policy Against
Revival Amount.
8.2 TYPES OF REVIVAL SCHEMES IN LIC
There are five types of schemes are available in LIC of India. These are
Ordinary Scheme, Special Scheme, SB cum Revival scheme, loan cum
revival scheme and installment revival scheme.
8.2.1 Ordinary Revival Scheme
It’s the simplest scheme of all, all you have to do is to visit your servicing
branch, get the revive quotation from the branch and deposit all the due
premiums in your policy with DGH (Declaration of Good Health) or
special medical report wherever applicable as per age and sum to be
revived.
8.2.2 Special Revival Scheme
Sometimes it is not possible to pay all the due premiums due to huge
amount to revive policy, and policy holder do not want to lose the money
he has already paid as premium in particular policy (Majority of the
policies acquire paid up value after premium have been paid for full
three years and 3 years completed in policy). For customer whose policy
have not acquired paid up value (Premium is not paid for 3 years) and
policy is in lapsed condition for not less than 6 months and not more
than 3 years (6 months < FUP > 3 years), the policy can be revived
under Special Scheme.
Under this scheme Date of commencement can be increased up to 2
years of original date of commencement and
• other requirements will be same as of ordinary scheme
• the difference of new and old premium must be deposited with
any due premium
• Since DOC and maturity date will shift, consent of policyholder is
required
• endorsement fee of Rs. 50 and policy bond for endorsement is
required
• this type of revival can be done once in policy term
• Policies under withdrawn plans can be revived under this
scheme, even if the new date of commencement falls beyond the
date of withdrawal of the plan provided the other conditions
applicable for the scheme are satisfied.
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• Some policies are not allowed under this scheme.
• For policies issued before 01/01/2014, a new date of
commencement (DOC) should not be later than 31/12/2013. (As
per LIC circular CO/CRM/1012/23 dated 18/03/2016) As per the
LIC of India circular CO/CRM/1012/23 dated 17/03/2016, Special
Revival scheme is not available to new plans launched on or after
01/01/2014.
8.2.3 Loan-cum-Revival Scheme
Under this scheme, the policyholder can take the loan in his/her policy
and that loan amount is adjusted in premiums. It is not necessary that
your policy has acquired paid up value, even policy was paid up value is
not acquired can be revived. The loan amount is calculated as if the
policy is in force condition till the date of revival. Very useful scheme if
the policyholder is not able to pay lump sum revival amount from his
pocket at that time.
8.2.4 Survival Benefit cum Revival Scheme
The revival of money back policies can be allowed under ordinary revival
by taking into account the amount of survival benefit that had fallen due.
The policyholder has to submit usual revival requirements, S.B.
discharge form and policy document.
This scheme is allowed for
1. Survival benefit amount is more than revive amount and balance
amount after utilizing amount for revival is payable to
policyholder
2. Survival benefit amount is less than revival amount. However,
shortfall amount will be required to be paid by policyholder
8.2.5 Revival by Installment Method
Under this scheme, the amount is spread over the next two year. Revivl
under this scheme will be permitted-
• for the policyholder who is not in a position to pay the arrears of
premiums in one lump sum and policy cannot be revived under
special scheme. where the arrears of premiums are for more than
1 year.
• There is no loan outstanding under the policy at the time
• No survival benefit falls due during the installment paying period
of revival
The arrears of premiums will be calculated in the usual manner
as under ordinary scheme. Depending upon the mode of
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payment, life assured has to pay initially 6 Monthly premiums, 2
Quarterly premiums, 1 Half-premium, or ½ of Yearly premium.
Balance of the arrears will be spread over in the remaining
premium due date in current policy anniversary and two full
policy anniversaries thereafter
8.3 PAID UP POLICY
A paid-up policy is one that requires no further premium payments and
continues to provide benefits till maturity. . A policy can be converted to
a paid-up policy once it acquires a surrender value which is typically
after 2-3 annual premiums are paid for traditional plans.
The concept of Paid-Up Policy applies strictly to Traditional Life
Insurance Plans only and not to Unit Linked Insurance Plans. ULIPs can
be surrendered, but it need not acquire a Paid-Up Value for the same.
The surrender value is a part of the Fund Value of the ULIP.
Definition: Life insurance policies usually last the insured's lifetime, but
some policies can be paid up completely till a specified age. A life
insurance policy in which if all the premium payments are complete and
the insured is free of all payment obligations, the policy stays intact until
insured's death or termination of the policy is called paid-up policy.
Description: Paid-up policy falls into the category of traditional
insurance plans. The sum assured is limited to the paid-up value. It is
calculated as the ratio of number of premiums paid to the total number of
premiums that were supposed to be paid according to the policy
multiplied by the sum assured at maturity.
When the premium of a life insurance policy is not paid on time, the
policy lapses and most of its benefits cease to exist. In case of a lapsed
traditional insurance policy, if the premiums are paid for a minimum 3
years the policy gets converted into Paid Up Insurance Policy. In this
case, the paid premiums are not lost. In such cases the sum assured of
the policy is reduced in proportionate with the number of premiums paid
and total number of premiums of the policy.
Thus, a Paid-Up Policy is when the customer has stopped paying
premiums, but there is some money that is due to the policyholder but is
with the insurance company for the time being. It continues to earn
interest from where it has been invested and hence the Paid-Up Value of
the life insurance policy keeps increasing. If the policy money is not
withdrawn, it continues till the end and the Maturity Benefit is paid out,
according to the reduced Sum Assured. If the money is withdrawn
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before the policy matures, then it needs to be surrendered to receive a
cash value of the Paid-Up Policy.
8.4 THE DEFERMENT PERIOD
The deferment period is generally a part of deferred annuity plans.
These are retirement plans that also offer the benefit of a life cover.
When you buy a retirement plan that offers a deferred annuity benefit,
you need to pay your premiums for a specified number of years. After
this, the deferment period kicks in. During this period, neither do you
have to make any payments to the insurer, nor does the insurer make
any annuity payouts. And once the deferment period ends, your annuity
payouts begin.
So, the deferment period is the period after which your annuity payouts
are made in a deferred annuity plan.
1. Income benefit period
The income benefit period is a characteristic feature in all life insurance
plans that offer income benefits. This includes savings plans that offer
income payouts as well as retirement plans that offer annuity benefits.
As the name indicates, the income benefit period is simply the duration
over which the insurer pays you the periodic benefits offered by the plan.
The Monthly Income Plan, for example, comes with a premium payment
term of 10 or 12 years, a deferment period of 0, 5 or 10 years, and an
income benefit period of 10, 15 or 20 years.
2. Grace period
Missing your premium payments can lead to your policy lapsing.
However, in case you forget to make one of your premium payments,
your policy will not immediately lapse. Instead, there will be a grace
period during which your policy will continue to remain active, and the
coverage and the benefits it offers will remain in force.
In case you fail to pay your premiums during the grace period, that's
when policy will lapse. Most policies offer a grace period of 30 days.
Some policies have a grace period of just 15 days. Remember to read
your policy document thoroughly to understand the grace period.
3. Revival period
In case your policy has lapsed, you can still revive the policy and
reactivate the full coverage by paying all the outstanding premiums
within a specific period. This is known as the revival period, and it
commences from the due date of the first unpaid premium.
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The revival period varies from one policy to another, based on the terms
and conditions of the policy. For instance, if you have purchased the a
Guaranteed Milestone Plan and your policy has lapsed, you can revive it
for full coverage within five years from the date the last unpaid premium
was due. And you can do this by paying all the outstanding premiums
along with the interest due thereon.
8.5 NOMINATION & ASSIGNMENT OF POLICY
In Life Insurance, nomination can be understood as a facility, which
allows the policyholder or say insured to nominate a person, who can
claim the policy amount, in the event of death of policyholder. If, in case,
a minor is appointed as nominee, then a major should be specified, in
order to receive the money secured by the policy, upon the demise of
the insured.
The policyholder can make nomination either at the time of purchasing
the policy, or any time before the expiry of the term. The policyholder is
allowed to change the nomination, during the term of the policy, by
making a fresh nomination, which should be incorporated, either through
text in the policy or through an endorsement to the policy, to become
effective.
Assignment, as the name suggest is the legal transfer of rights from the
policyholder to the assignee to receive benefits indicated in the
insurance agreement. It is usually made out of love and affection with
the family members or for adequate consideration to any outside party.
The assignment can be made either through an endorsement upon the
policy or separate instrument, duly signed by the assignor or his agent.
The signature is required to be witnessed by at least one person
competent to contract. It becomes effective from the date when the
documents are received by the insurance company in proper order.
8.6 DIFFERENCES BETWEEN NOMINATION AND ASSIGNMENT
The difference between nomination and assignment can be drawn
clearly on the following grounds:
1. The appointment of an individual by the assured to receive the
amount secured by the policy, upon the demise of the assured is
known as a nomination. On the other hand, assignment refers to
cede the right, ownership, and interest in the policy to another
person.
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2. In the nomination, there is no requirement of attestation by the
witness. Conversely, attestation by at least one witness is
required in case of assignment.
3. In the nomination, there is no such thing like consideration. In
contrast, the assignment can be with or without consideration.
4. Nomination does not entitle nominee the right to sue under the
policy. On the contrary, assignment entitles the assignee the
right to sue under the policy.
5. The nomination is made to help beneficiary recover the policy
amount when it becomes due for payment. As against this,
assignment aims at transferring all rights and interest in favor of
the assignee.
6. Nomination can be revoked or changed several times, whereas
assignment can be canceled only one or two times during the
policy term.
7. The nomination is made in favor of immediate relatives. As
opposed, assignment is made in favor of immediate relatives or
to external party.
By and large, a nomination only accentuates the hands, to whom the
policy amount is to be paid on the death of the assured, so that the
insurance company gets the valid discharge of liabilities, as per the
policy. Nevertheless, the amount can be claimed by the legal heirs of the
policyholder.
The assignment is generally made by the policyholder out of love for the
immediate relatives or even for certain consideration from an external
party. Assignment without consideration to an external party is subject to
detailed scrutiny, as it is seen as a possible way of money laundering.
8.7 MEANING OF BONUS IN INSURANCE:
For an insurer, the premium amount paid by the policyholders towards
life insurance policies forms the asset. It is used to manage the business
and pay for the death claims as and when required. However, a major
portion of the asset is invested by the company in securities, bonds and
other financial investments for profits. The surplus amount made by the
profits over the liabilities is used to pay the policyholders as a bonus. It is
generally distributed at the end of every financial year.
8.8 TYPES OF BONUSES IN INSURANCE
Bonuses are categorized under four types for a participating life
insurance policy.
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1. Reversionary Bonus
The profits allocated to each participating policy are paid in the form of a
Reversionary Bonus. A reversionary bonus adds value to the total
amount payable to the policyholder or nominee. A reversionary bonus is
usually declared at the end of every financial year and it is payable at
the time of a claim.
There are two common types of reversionary bonuses, as specified
below.
a) Simple Reversionary
The simple reversionary bonus is calculated as a percentage of the sum

assured. It is declared as per thousand of the sum assured every year.If
the Simple Reversionary Bonus rate is Rs 50 per thousand of sum
assured and sum assured of the policy is Rs 10 lakhs.
Bonus = 50 x (10,00,000/1000) = Rs 50,000
b) Compound Reversionary
The compound reversionary bonus is also computed as a percentage

rate, but it applies to the sum assured and to all the accrued bonuses
previously available in the policy. The bonus of each year is added to the
sum assured and the next year's bonus is calculated on that the total
amount. These bonuses increase with time due to compounding effect.
If the compound reversionary bonus of 5% is declared for the entire
policy term and sum assured of the policy is Rs 10 lakhs.During the first
year, the accrued Compound Reversionary Bonus (CRB) will be Rs
50,000 i.e., (5% of 10,00,000). In the second year, this Rs 50,000 will be
added to the sum assured of 10,00,000, and now the bonus would arrive
at 52,500 [5% of (10,00,000 + 50,000)]. Compound reversionary bonus
will increase year by year due to compounding impact.
2. Interim Bonus
Bonuses are usually declared at the end of the financial year. But, in
case a policy matures, or death occurs in between the two successive
bonus declaration dates, the interim bonus is then payable. This bonus
is calculated for the remaining days from the last bonus date.
3. Terminal Bonus
Terminal bonus (final bonus) is declared and added only for policies,
which attain maturity. This bonus is offered to the policyholders for
keeping the policy till its maturity date. This bonus thus will not be
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payable for policies which have been surrendered or for policies which
have acquired paid-up value.
4. Cash Bonus
The cash bonus accrued in a year will be paid in the form of cash at the
end of the financial year. This bonus is payable on a yearly basis rather
than at maturity.
If the policyholder is planning to get a 20-year insurance policy, he or
she can ask the insurer for the bonus rate declared in the past 20 years
along with the life insurance quotes. It will provide a fair idea of the
bonus amount.
How is the life insurance bonus calculated?
The bonus declared by a life insurance company is based on the return
from securities and other investments made. It also depends on the
mortality rate of the year.
The exact bonus of the life insurance company is based on its
profitability. The quantum of profit varies every year. And, hence the
bonus also keeps varying every year. The bonus assured to the
policyholder depends on the life insurance policy and the policy term. It
is calculated as a certain percentage of the sum assured in the individual
plan.
It can be a certain amount per Rs. 1000. For example, suppose the
bonus is Rs. 50 for every Rs. 1000. In that case, if the sum assured for a
life insurance policy is Rs. 5 lakhs, then the bonus amount is Rs. 25000.
The calculated bonus is generally provided as a maturity benefit or to
the nominee in case of a death benefit. It is also provided when the
policy is surrendered. Some of the insurers allow the policyholders to
encash the bonus during the policy term.
8.9 SURRENDER VALUE
Surrender – you can surrender the policy if at least 3 years' premium has
been paid, i.e., the policy has acquired a paid-up value. On
surrendering, the Surrender Value is paid immediately to the
policyholder and the plan terminates
It is the amount the policyholder will get from the life insurance company
if he decides to exit the policy before maturity. Description: A mid-term
surrender would result in the policyholder getting a sum of what has
been allocated towards savings and the earnings thereon.
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Definition: Insurance policy lapses when the insured defaults on the
payments of renewal premium beyond a grace period. Insurance
companies provide an option of reactivating the lapsed policy, within a
specific period of time post the grace period.
Meaning of cash value for life insurance
As you pay premiums on a permanent life insurance policy, you can
build cash value—a kind of separate account within the policy (or an
annuity).
1 To help it grow, after policy charges, your provider sets aside a portion
of your premiums into the separate account, which can earn interest.
Permanent life insurance generally stays in effect for as long as you pay
your premiums. This differs from term policies, which don't build value
and typically last for set periods like 10, 20 or 30 years. (After that
period, you can continue the policy but likely will pay more each year—
most term policies feature “level” premiums—as you age).
8.10 KINDS OF LIFE INSURANCE HAVE CASH SURRENDER

VALUES
Unlike term life insurance, permanent life policies include a cash value
that you can tap through policy withdrawals and loans. For example:
8.10.1 Universal life insurance
policies don't expire (as long as you pay required premiums and meet
other conditions). They also have flexible premiums and death benefits
(the amount beneficiaries receive if you die). Their cash values earn
interest based on market rates or a minimum rate stated in the policy—
and you may be able to access some of that cash value without
diminishing the policy's original death benefit (aka “face value”).
8.10.2. Whole life insurance
This type of policy also can last your entire life, but the premiums are
fixed. As you make payments, your cash value should grow. If you want
to access your full cash value and cancel your policy, you will receive
your cash surrender value. (Of course, that would defeat the main
purpose of buying life insurance: to help secure your loved ones' futures
if you should die.)
LET US SUM UP
A mishap or eventuality can happen to any person and at any time,
therefore getting oneself insured under a life insurance plan is a must in
order to deal with the unfortunate life events. It is the ideal way to secure
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the future of your dear ones even after your death. Apart from buying a
life insurance plan, one must also remember to renew the insurance
plan timely alongside revival of the lapsed insurance plan.These are the
various types of bonuses payable and it may vary, depending upon the
life insurance policy chosen and the insurer you opted for. It is advisable
to check the type of bonuses applicable. People have many reasons to
surrender a policy, though they should often reconsider before giving the
policy up. Other times, there are good reasons to terminate the
coverage. What happens a lot of times is that after owning life insurance
for a number of years, people have financial changes in their lives.
CHECK YOUR PROGRESS
1. A bonus calculated as a percentage of the sum assured and the
bonus accrued last year.
a) Compound Reversionary Bonus b) Interim bonus
c) Surrender value d) Cash Bonus

2. Which amount the policyholder will get from the insurance
companies if he decides to exit the policy before maturity.
a) Annuities b) Interim value

b) Surrender value d) Bonus value
3. ________ policies have no specified term but can be renewed each
year without providing evidence of insurability.
a) Decreasing term policies b) Yearly Renewable Term Policies
c) Level Term Policies d) Level Premium Policies
4. The legal transfer of rights from the policyholder to the assignee to
receive benefits indicated in the insurance agreement.
a) Nomination b) Compound interest
c) Interim Benefit d) Assignment

5. This type of policy also can last your entire life, but the premiums are
fixed.
a) Universal life insurance b) General insurance
c) Whole life insurance c) Life insurance.
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GLOSSARY
Tax sheltering : To minimize or decrease their taxable incomes
Reversionary : Once the insured dies, the policy pays an annuity

annuity to the beneficiary.
Interim bonus : any bonus amount payable to a Participant
SUGGESTED READINGS
Limited
Limited
WEB RESOURCES
1. What Is The Difference Between Accumulation Value And

Surrender Value On A Life Insurance Policy? - Bing video
2. What is Relevant Life Insurance? - YouTube
3. Should you surrender life insurance policy? - Bing video
4. Cash Value vs. Surrender Value: What's the Difference?
(investopedia.com)
1.a) 2.b) 3.b) 4.d) 5.c)
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BLOCK 3
GENERAL INSURANCE
UNIT 9 : INTRODUCTION TO GENERAL INSURANCE
UNIT 10 : FIRE AND MARINE INSURANCES

UNIT 11 : MOTOR INSURANCE
UNIT 12 : PROCESS OF GENERAL INSURANCE
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UNIT 9
INTRODUCTION TO GENERAL
INSURANCE
STRUCTURE
Overview
Learning objectives
9.1 Introduction and Concepts of General Insurance
9.2 General Insurance Business Nationalization Act, 1972
9.3 Objectives of the Act
9.4 Importance / Need of General Insurance
9.5 Types of General Insurances in India
9.6 Advantages of General Insurance Plans

9.7 Present Structure of General Insurance in India
9.7.1 Liberalization of Insurance Sector in India
9.7.2 Structure of General Insurance

9.7.2.1 Companies in Public Sector
9.7.2.2 Companies in Private Sector
9.8 Principles of General Insurance
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
After studying the previous unit, the life insurance and its importance,
the over aspect of insurance other than ‘Life Insurance’ is General
Insurance. General Insurance comprises of insurance of property
against
fire, burglary etc, personal insurance such as Accident and Health
Insurance, and liability insurance which covers legal liabilities. Suitable
general Insurance covers are necessary for every family. It is important
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to protect one’s property, which one might have acquired from one’s
hard-earned income. Losses created to catastrophes such as the
tsunami, earthquakes, cyclones etc. have left many homeless and
penniless. Such losses can be devastating but insurance could help
mitigate them. Property can be covered, so also the people against
Personal Accident
LEARNING OBJECTIVES
• gain knowledge in fundamental of general insurance
• evaluate the General Insurance Act and its scope
• explain the need / importance of the general insurance
• describe different types of general insurance
• explain about the structure of general insurance in India
• list out the principles and the advantages of general insurance
9.1 INTRODUCTION AND CONCEPTS OF GENERAL INSURANCE
The insurance segment in India is divided into two categories – life

insurance and general insurance. While life insurance policies cover the
financial loss suffered due to loss of life, general insurance policies
cover the financial loss suffered due to the loss of an asset. General
insurance, therefore, covers the loss of economic value of assets or the
financial loss suffered due to specific contingencies. General insurance
has different types of plans, each of which is designed to cover specific
risks. So, let’s understand the concept and the types of general
insurance plans in India.
General insurance or non-life insurance policy, including automobile and
homeowners’ policies, provide payments depending on the loss from a
particular financial event. General insurance is typically defined as any
insurance that is not determined to be life insurance.
Concepts of General Insurance
General insurance is the insurance of assets, financial assets included.
If, due to a contingency which is covered under the plan, there is an
economic loss, the loss is compensated by general insurance policies.
General Insurance comprises of:
• Insurance of property against fire, theft etc.
• Personal Insurance such as Accident & Health Insurance.
Liability Insurance which covers legal liability arising out of third-
party claims such as claim from a person injured in a motor
accident etc.
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• Other types of Insurances such as Credit Insurance, Crop
Insurance, etc
9.2 GENERAL INSURANCE BUSINESS NATIONALIZATION ACT,
1972
This Act came into force on 1st January, 1973. This Act gave effect to
clause (c) of Article 39 of the constitution of India. Article 39 (c) read as
follows:
―The State shall direct its policy towards securing that the operation of
the economic system does not result in concentration of wealth and
means of production so as to prove harmful to the common interest of
the community‖.
Under this Act, there were no longer private insurers in the country. As a
result, general insurance business became the domain of the State. The
General Insurance Corporation of India (GIC) became the holding
company with four subsidiaries, namely United India Insurance
Company with Head Office in Madras, Oriental Insurance Company with
Head Office in New Delhi, National Insurance Company with Head
Office in Calcutta and New India Assurance Company with Head Office
in Bombay. The ownership of all shares of both the Indian insurance
companies and the foreign insurers from then on vested in the Central
Government with effect from 1.1.1973. The services of all the personnel
in the private sector were also transferred to the holding company and
subsidiaries based on factors such as qualification, seniority, position
and location.
9.3 OBJECTIVES OF THE ACT
The object of the Act was primarily,
• To provide for the acquisition of the shares of the existing
general insurance companies
• To serve the needs of the economy by development of general
insurance business
• To establish the GIC by the central government under the
provisions of the Companies
• Act of 1956, with an initial authorized share capital of seventy –
five crores.
• To aid, assist, and advise the companies in the matter of setting
up of standards in the conduct of general insurance business.
• To encourage healthy competition amongst the companies as far
as possible
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• To ensure that the operation of the economic system does not
result in the concentration of wealth to the common detriment.
• To ensure that no person shall take insurance in respect of any
property in India with an insurer whose principal registered office
is outside India
• To carry on of any part of the general insurance business if it
thinks it desirable to do so
• To advice the companies in the matter of controlling their
experience and investment of funds
9.4 IMPORTANCE / NEED OF GENERAL INSURANCE
General Insurance is the best practical option for every person who
would like to cover himself from loss arising out of risks.
• Risk is associated with everything that we do or are involved in.
Immovable Properties that we own are prone to fire and damage
/ destruction due to natural calamities such as Earthquakes,
Floods etc.
• Movable properties including personal effects such as jewelry are
prone to theft and burglary.
• Vehicles are also prone to accidents. Similarly human beings are
prone to injuries resulting from accidents and illnesses.
• All the incidents enumerated above would result into financial
losses.
• Then there could be Third Party Claims on you. For instance, you
are driving a car and unfortunately you meet with an accident in
which a pedestrian is injured. Such person will have a Claim on
you. Also, there could be claims on you while you are performing
your professional duties. A Doctor may be subject to a claim for
negligence in treating a patient.
• General Insurance, wherever applicable, would provide cover
against such losses. The modern-day General Insurance covers
practically all losses arising out of risks. The primary risk that is
not covered by General Insurance is death of a person which is
covered by Life Insurance.
• Needless to say, when the losses due to risks are covered a
person would lead a peaceful life.
• The Security provided by General Insurance would improve the
quality of life of a person.
• Apart from the peace of mind General Insurance also covers
Business Losses and Personal Losses in case the unfortunate
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incident happens resulting in the loss. This would help the person
who has suffered loss to run his business smoothly.
• Deciding on which insurance plan you need will depend on what
you are looking to insure.
• If you are looking to purchase an insurance plan for your family,
a health or accident plan would be most suitable.
• Protecting your assets and travelling safely should be simple and
affordable in the general insurance.
• General insurance plan covers the structure or contents of your
home. This is the amount you would have to pay out before the
insurer contributes to your repair bill.
• Insurance plans will help you pay for medical emergencies,
hospitalisation, contraction of any illnesses and treatment, and
medical care required in the future.
• The financial loss to the family due to the unfortunate death of
the sole earner can be covered by insurance plans.
• Insurance plans will help in protecting the future of your child in
terms of his/her education.
9.5 TYPES OF GENERAL INSURANCES IN INDIA
Almost everything is insurable. However, General Insurance in India is
bifurcated as Fire, Engineering, Marine and Miscellaneous Insurance.
Let us look at them as per the use and general acceptability. Following
are the different types of General Insurances in India:
1. Health Insurance
2. Travel Insurance
3. Motor Insurance
4. Marine Insurance
5. Home Insurance
6. Commercial Insurance
Digit Insurance also offers insurance policies for Mobile, Bicycle, Shop
Protection, and others.
1. Health Insurance
The Health Insurance cover from Digit offers protection for the medical
expenses incurred due to hospitalization caused because of an accident
or illnesses.
Although every policy is different, based on who it's being purchased for,
it mainly covers:
• Accidental Hospitalization (pre & post)
• Accidental illness and hospitalization
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• Day-care procedures
• Psychiatric Support
• Annual Health Checkups
• Daily Hospital Cash
The cover can be extended to cover the following with some predefined
conditions:
• Maternity benefit with Infertility benefit
• Critical Illness
• Organ Donation
• AYUSH (Alternate Treatment)
The premium for the health insurance is charged on the basis of:
• Age
• Pre-existing illness
• Lifestyle Habits
• Type of coverage
• Your family health history
2. Travel Insurance
Travel Insurance covers your financial liability, if any, when you travel
within or beyond the Indian boundaries. The financial liability may arise
due to medical or non-medical emergencies.
The duration of the travel for one time can be 180 days at the maximum.
The policyholder can take more than one trip in a year. Your Travel
Insurance will cover:
• Loss of Baggage
• Loss of Passport
• Hijacking
• Medical Emergencies
• Delayed Flights
• Accidental Deaths
• Adventure Sports
Digit’s Travel cover comes with worldwide support and special features
like:
• Zero Deductibles.
• Smartphone enabled claim process.
• Customized Travel Plan Cover.
• Missed call claim facilitation.
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3. Motor Insurance
A Motor Insurance Policy is mandatory to be able to drive legally in
India. Broadly there are two types a) Third-Party Liability b)
Comprehensive Package Policy.
A Third-Party Policy covers for losses faced in a situation where your
vehicle damages any third-party such as a public property, person or
third-party vehicle. The same is the minimum requirement to be able to
drive legally in India, as stated by the Motor Vehicles Act.
A Comprehensive Package Policy covers both third-party damages and
liabilities and damages/losses caused to you and your own vehicle. The
losses may arise due to an accident, theft, fire, natural calamities, and
others.
Digit Insurance provides some add-ons under its Comprehensive
Package Policies for Cars and Bikes that act as additional shields to
your vehicle, such as:
• Tyre Protect Cover

• Zero Depreciation Cover
• Return to Invoice
• Engine and Gearbox Protection
• Breakdown Assistance Cover
4. Home Insurance
You build your home with your toil and hard-earned money. Everything
you buy is a priceless possession for you and hence it needs to be
protected.
A Home Insurance Policy protects your valuable and other assets. It is a
comprehensive package policy that covers all valuables.
Digit Insurance gives protection for Home against Burglary,
Loss/Damage of Jewelry, Fire and Natural Disasters.
5. Commercial Lines
The lines of insurance that affects the business operations in the real
terms are categorized under the Commercial Lines of Insurance. Type of
the insurance covers that one can buy may include:
• Property Insurance
• Engineering Insurance
• Liability Insurance
• Marine Insurance
• Employees Benefit Insurance
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• Business Interruption
Depending on the type of occupation, risk exposure, and the money
involved, the insurance could be different for each industry or business.
For example, an insurance that is specific to a cement plant, versus one
for an IT company will be different. The premium charged for a cement
plant will be higher than a showroom of air conditioner.
Therefore, Insurance is completely based on the level of the risk
exposure. A worker in the cement plant is more prone or susceptible to
injury than to the one who is working in the showroom.
6. Mobile Insurance
Simple as it reads. A mobile insurance protects the phone from
accidental damage. Under the mobile protection cover, Digit Insurance
compensates for repair of accidental screen damage to your phone.
The buyers can have mobile insurance for both an old or new phone.
Very affordable insurance protection for the most expensive phones you
buy.
7. Bicycle Insurance
Not just the cars and two wheelers, people are now passionate for
expensive bicycles also. Call it a fashion or change of lifestyle, Bicycle
Insurance is another sought product these days. Digit Insurance offers
cover against Personal Accident, Theft, Accidental Damage, and
Hospital woes.
9.6 ADVANTAGES OF GENERAL INSURANCE PLANS
General insurance plans are beneficial because of the following reasons
The plans cover financial losses and compensate you for the losses that
you suffer. As such, general insurance plans provide you financial
security even in the case of contingencies
• In some cases, general insurance plans are mandatory by law.
For instance, motor insurance plans are mandatory as per the
Motor Vehicles Act, 1988. Similarly, if you are travelling to
Schengen countries, you mandatorily need a valid overseas
health insurance plan. When you buy such mandated plans, you
fulfil the legal obligation and save yourself from violation offence
• General insurance plans help in protecting your savings in
emergency situations. You can, therefore, use your savings to
fulfil your financial goals
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• Health insurance plans, which are a type of general insurance
plan, allow you tax benefits. The premiums paid for such plans
are allowed as a deduction under Section 80D. This deduction
helps in lowering your taxable income which, in turn, lowers your
tax liability and helps you save tax.
9.7 PRESENT STRUCTURE OF GENERAL INSURANCE IN INDIA
9.7.1 Liberalization of Insurance Sector in India
Although Indian Economy started opening up both to private sector and
to foreign investment in the year 1991, Insurance sector still remained
the domain of Govt of India.
The setting up of Insurance Regulatory Authority (IRDA) in the year
1999 paved the way for liberalization and privatization of Insurance
Sector to private sector.
IRDA has separated out Life, Non Life and Reinsurance business.
Therefore, a company has to have separate licenses for each line of
business.
9.7.2 Structure of general insurance
As of now there are more than 30 companies in India that carry out the
business of General Insurance.
The division of these Companies is as follows
9.7.2.1 Companies in Public Sector
As of now there are four General Insurance Companies in Public Sector
in India.
These are as follows:
• National Insurance Company Ltd.
• New India Assurance Company Limited
• Oriental Insurance Company Ltd
• United India Insurance Company Ltd.
These Companies function independently. However, they have formed
an association known as General Insurance (Public Sector) Association
of India (GISPA) with headquarters in Delhi.
These four Public Sector Insurance Companies have contributed along
with General Insurance Corporation of India (GIC) and NABARD (
National Bank of Agriculture and Rural Development) to set up a Crop
Insurance Company called Agricultural Insurance Company of India Ltd.
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This Company provides crop insurance to protect the farmers against
crop losses suffered due to natural calamities. The Head Office of this
Company is in New Delhi.
Apart from this there is another specialized company which provides
insurance for risks associated with international trade. This Company is
called Export Credit Guarantee Corporation of India Ltd.
Thus, technically there are 6 companies in this category.
9.7.2.2 Companies in Private Sector
The balance other more than 24 companies carrying out General
Insurance Business are in the Private Sector.
9.8 PRINCIPLES OF GENERAL INSURANCE
1. Nature of Contract: Nature of contract is a fundamental
principle of insurance contract. An insurance contract comes into
existence when one party makes an offer or proposal of the
contract, and the other party accepts the proposal.
2. Principle of Utmost Good Faith: In the case of a contract both
the parties to the contract are required by law to observe good
faith. However, in general transactions, say a transaction where
a person has gone to a store to buy some products, the buyer is
supposed to satisfy himself about the features of the product that
he is buying. The seller is supposed to disclose all material facts
about the product and also the facts so disclosed should not be
misleading. However, the is not obliged to disclose each and
every fact of the product. This casts a responsibility on the buyer
to satisfy himself about the quality and other features of the
product.
3. Principle of Insurable Interest: A person is supposed to have
Insurable Interest in something when the loss or damage to that
thing would cause the person to suffer financial or any other kind
of loss. Thus, insurable interest means that the Insured must
stand to suffer a direct financial loss if the event against which
the insurance policy is taken does actually occur. The insurable
interest is generally established by ownership, possession or
direct relationship. For example, people have insurable interest in
their own houses and vehicles and not in neighbour’s houses
and certainly not that of strangers.
4. Principles of Indemnity: Indemnity according to Cambridge
International Dictionary means ‘Protection against possible
damage or loss. Thus, Indemnity means security, protection and
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compensation given against damage, loss or injury. In context of
Insurance indemnity is defined as ‘Financial Compensation
sufficient to place the Insured in the same financial position after
the loss as he enjoyed immediately before the loss was incurred’.
5. Principle of Subrogation: The Principle of Subrogation is
basically a corollary or an offshoot of the Principle of Indemnity.
We have already seen in the preceding sections that the purpose
of indemnity is to ensure that the Insured does not make any
profit or gain in any way or as a consequence of loss. He should,
at the maximum, in the same financial position which he had
occupied immediately before the loss had been incurred.
6. Principle of Contribution: Contribution is also a Corollary or
Offshoot of Principle of Indemnity. An individual may have more
than one policy for the same in respect in of the same property
and in case of a loss if the Insured is able claim compensation for
the said loss from all Insurers it is but obvious that he would be
making a profit from this loss. This is against the Principal of
Indemnity.
7. Principle of Causa Proxima (Proximity Clause): Principle of
Causa Proxima is a Latin phrase in English which means
Principle of Proximity. The loss to a property can be caused by
more than one cause. Under this principle in such a situation the
nearest or the closest or the most proximate cause shall be taken
into consideration to decide the liability of the insurer.
LET US SUM UP
Insurance is a concept that applies to a large group of people which may
suffer the same risk in the same conditions or region. The money
collected as the premium can be called as a pool and when anyone
faces a loss, the person is paid from that pool. Still perplexed at how a
general insurance policy comes into play. Consider that your mother
suffered a heart attack suddenly and she needs a transplant. General
insurance plans are the ideal solution for covering your financial risks.
The different types of general insurance policies provide coverage for all
possible types of financial risks that you might face. So, choose the
policies that you require and invest in general insurance for financial
security. The principle of indemnity and their corollaries and proximate
cause has been formulated so that any person does not make profit out
of the insurance transaction. The basic purpose of insurance is that the
insured is put in same financial position as he was before the loss.
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CHECK YOUR PROGRESS
1. Personal insurance covers ______
a) Accident and health insurance
b) Accident and life insurance
c) Accident and general insurance
d) Accident and marine insurance
2. General insurance business nationalization act was come into force
on ______
a)1st January 1973 b)1st January 1983
c)1st January 1993 d)1st January 2003
3. The authorised share capital of the act of 1956 ______
a)75 crores b)85 crores

c)95 crores d)105 crores
4. The insurance regulatory authority was set up in
a)1999 b)1998
c)1997 d)1996
5. Which is not a type of general Insurance
a) Marine Insurance b) Life Insurance
c) Crop Insurance d) Health Insurance
GLOSSARY
General : It is the insurance of assets, financial assets
insurance included. If, due to a contingency which is
covered under the plan, there is an economic
loss, the loss is compensated by general
insurance policies
Health Insurance : It covers from Digit offers protection for the
medical expenses incurred due to
hospitalization caused because of an accident
or illnesses.
Principle of : In the case of a contract both the parties to the
Utmost Good contract are required by law to observe good
Faith faith
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SUGGESTED READINGS
1) M. N. Srinivasan : Principles of Insurance Law, Wadhwa & Co.
2) Rajiv Jain : Insurance Law and Practice, Vidhi Publication Private
Limited
3) George E. Rejda : Principles of Risk Management and Insurance
4) Dr. Avtar Singh : Law of Insurance, Universal Publication Pvt.
Limited
5) Insurance Principles and Practice by S.Chand
6) Elements of Insurance by Dr.A.Murthy
WEB RESOURCES
1. IC-38 (General Insurance) - Important Questions - Bing video
2. CA1 Chapter 8 General Insurance. (Actuarial Science) - Bing
video
3. IC 11 Chapter 3- Fire and Marine Insurance Product' Notes -
YouTube

1.a) 2.a) 3.a) 4.a) 5.b)
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UNIT 10
FIRE AND MARINE INSURANCES
STRUCTURE
Overview
Learning Objectives
10.1 History of Fire Insurance
10.2 Meaning of Fire Insurance
10.3 Features of Fire Insurance

10.4 Fire Insurance Policy
10.5 Requirements of Fire Insurance Policy
10.6 Types of Fire Insurance Policies
10.7 Fire Loss of Profit Insurance
10.8 Introduction to Marine Insurance
10.9 History of Marine Insurance
10.10 Types of Marine Insurance
10.11 Types of Marine Insurance Policies
10.12 Marine Cargo Policy
10.13 Marine Hull Policy
10.14 Features of Marine Hull Insurance
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
we will explain various insurance policies related to non-life /general

insurance. Non-life /general insurance means the insurance of various
tangible or non-tangible assets other than human life. Even loss of
human life or damage to human body due to accidents are covered by
general Insurance. Thus, human life relates to life insurance and the
belongings. properties of human beings fall under this category. Fire
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insurance is a contract between the policyholder and the insurer. Here
the insurance company will pay to the policyholder any loss caused to
him or his particular property when destroyed by a fire accident. So the
protection is against any damage that the fire causes.
LEARNING OBJECTIVES
After completing this units, you will be able to:
• explain the meaning of fire insurance
• evaluate about features and requirements of the fire insurance
• list out the various types of fire insurance and its accounts
• settle the claim under fire insurance
• explain the general practice of marine insurance in India.
• examine the types of marine insurances and it polices
• explain the features of Marine hull insurance
10.1 HISTORY OF FIRE INSURANCE
The development of fire Insurance can be traced back to 1601 A.D.

when the Poor Relief Act was passed in England. Vide this act, letters
called “briefs” were read from the church asking for collections from the
public to help those who suffered losses from fire. There was a great fire
in London–a historical disaster–in which within span of three days from
2nd to 5th Sept.’1666,80% of the city was destroyed which sowed the
seeds of fire Insurance as we know it now.
First, only buildings were insured, and the first fire office was established
by a builder Nicholas Barbon in 1680. In 1708, Charles Povey founded
the Traders Exchange for insuring movable goods, merchandise and
stocks against loss or damage and this was the first to insure both the
building and its contents.
10.2 MEANING OF FIRE INSURANCE
As per the Insurance Act 1938, under Section 2 (6A), Fire Insurance is
defined as “the business of effecting, otherwise than independently to
some other class of business, contracts of insurance against loss by or
incidental to fire or other occurrence customarily included among the
risks insured against in fire insurance policies.”
Fire insurance is an agreement whereby one party (the insurer), in
return, for a consideration undertakes to the indemnify the other party
(the insured) against financial loss which he may sustain by reason of
certain defined subject matter being damaged by the destroyed by fire or
other defined perils up to an agreed amount.
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Fire insurance is a contract under which the insurer in return for a
consideration (premium) agrees to indemnify the insured/assured for the
financial loss which the Insured may suffer due to destruction of or
damage to property or goods, caused by fire, during a specified period.
Thus, the basic ingredients of Fire Insurance are as follows:
• The financial loss should be on account of fire resulting in
damage or destruction of property or goods.
• The maximum amount which the Insured can claim as
compensation in the event of loss is agreed to between the
parties at the time of entering into the contract.
For example, if a person has insured her house for Rs.10lakh against
loss by fire, the insurer is not liable to pay the full sum, unless the house
is destroyed by fire, but only pay the actual loss subject to the maximum
limit of Rs. 10lakh.
The following are the items which can be burnt/damaged through fire:
• Buildings
• Electrical installation in buildings
• Contents of buildings such as machinery, plant and equipment,
accessories, etc.
• Goods (raw materials, in–process, semi–finished, finished,
packing materials, etc.) in factories, godowns etc..
• Goods in the open
• Furniture, fixture and fittings
• Pipelines (including contents) located inside or outside the
compound, etc
10.3 FEATURES OF FIRE INSURANCE
(Dear learners, most of the features have already been discussed in the
earlier units and you must have studied under Principles of General
Insurance in other units)
1) Offer &Acceptance: It is a prerequisite to any contract. Similarly,
the property will be insured under fire insurance policy after the
offer is accepted by the insurance company. Example: A proposal
submitted to the insurance company along with premium on
1/1/2021 but the insurance company accepted the proposal on
15/1/2021. The risk is covered from 15/1/2021 and any loss prior
to this date will not be covered under fire insurance.
2) Payment of Premium: An owner must ensure that the premium is
paid well in advance so that the risk can be covered. If the
payment is made through cheque and it dishonoured, then the
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coverage of risk will not exist. It is asper section 64VB of
Insurance Act 1938. (Details underinsurance legislation Module).
3) Contract of Indemnity: Fire insurance is a contract of indemnity,
and the insurance company is liable only to the extent of actual
loss suffered. If there is no loss, there is no liability even if there is
fire. Example: If the property is insured for Rs 20 lakhs under fire
insurance and it is damaged by fire to the extent of Rs. 10 lakhs,
then the insurance company will not pay more than Rs. 10 lakhs.
4) Utmost Good Faith: The property owner must disclose all the
relevant information to the insurance company while insuring their
property. The fire policy shall be voidable in the event of
misrepresentation, mis-description or non-disclosure of any
material information. Example: The use of building must be
disclosed i.e whether the building is used for residential use or
manufacturing use, as in both the cases the premium rate will
vary.
5) Insurable Interest: The fire insurance will be valid only if the
person who is insuring the property is owner or having insurable
interest in that property. Such interest must exist at the time when
loss occurs. It is well known that insurable interest exists not only
with the ownership but also as a tenant or bailee or financier.
Banks can also have the insurable interest. Example: Mr. A is the
owner of the building. He insured that building and later on sold
the building to Mr. B and the fire took place in the building. Mr. B
will not get the compensation from the insurance company
because he has not taken the insurance policy being a owner of
the property. After selling to Mr. B, Mr. A has no insurable interest
in the property.
6) Contribution: If a person insured his property with two insurance
companies, then in case of fire loss both the insurance companies
will pay the loss to the owner proportionately. Example: A property
worth Rs. 50 lakhs were insured with two Insurance companies A
and B. In case of loss, both insurance companies will contribute
equally.
7) Period of fire Insurance: The period of insurance is to be defined
in the policy. Generally, the period of fire insurance will not exceed
by one year. The period can be less than one year but not more
than one year except for the residential houses which can be
insured for the period exceeding one year also.
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8) Deliberate Act: If a property is damaged or loss occurs due to fire
because of deliberate act of the owner, then that damage or loss
will not be covered under the policy.
9) Claims: To get the compensation under fire insurance the owner
must inform the insurance company immediately so that the
insurance company can take necessary steps to determine the
loss
10.4 FIRE INSURANCE POLICY
Fire insurance is a contract of insurance against the loss/damage by
accidental fire or other occurrences customarily included under a fire
policy. Types of Fire Policies. 1. Standard Fire and Allied Perils Policy.
The “Standard Fire and Allied Perils Policy” popularly known as SFSP,
covers the following perils: Fire.
10.5 REQUIREMENTS OF FIRE INSURANCE POLICY
A fire insurance policy gives the financial security for home, furniture,
shares, and other business assets. The policy is useful as it gives the
price of properties and assets which get damaged due to fire. Hence,
having a fire insurance policy is necessary for personal, social, and
national sectors.
The policy conditions may be precedent to the contract conditions
subsequent to the contract and conditions precedent to liability. The
conditions must be fully complied with to make the insurer liable under
the contract. The conditions may be implied or express. Fire insurance
policies are classified into various types based on insurance hazards,
insured risk, business type, policy rules. Fire insurance policies typically
contain general exclusions, such as war, nuclear risks, and similar perils.
Express condition: Conditions which are set out in the policy are known
as express conditions which may be either of general nature and
therefore printed on the policy or conditions specially designed with
reference to a particular contract and are incorporated in the policy.
10.6 TYPES OF FIRE INSURANCE POLICIES
1) Specific Policy: Under it, any loss suffered by the assured is
covered only up to a specific amount which is less than the real
value of property. A specific policy is an example of under-
insurance. The insurer generally inserts an average clause in such
a policy so that in the event of loss, he only bears the rateable
proportion of such loss.
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2) Comprehensive policy: It is also known as an all-in-one-policy. It
covers losses arising from many kinds of risks, such as, fire, theft,
burglary, third party risks, etc.
3) Valued policy: Under this, the insurer agrees to pay a fixed sum
of money irrespective of the amount of loss to the insured.
4) Floating policy: It covers the property lying at different places
against loss by fire. An average clause will always be there in a
floating policy.
5) Average Policy: A fire policy containing an ‘Average Clause’ is
called an Average Policy. Under a specific policy (i.e., a policy
without the Average clause), in the event of loss, the insured can
claim up to the full amount of his policy, even if he has under-
insured his property.
Suppose the property insured for Rs. 10,000 is valued at Rs.
20,000 at the time of loss. This is a case of under-insurance. In
case of policy without an Average Clause, if the loss is say, for
Rs.8,000 the insured can claim this full amount from the insurer.
But, if the policy is ‘subject to average, i.e., if it is an average
policy, the insured will be paid (Rs. 8,000 x 10000 / 20000) = Rs.
4,000 only. Thus under an average 20,000 policy, the insured is
penalized for under-insurance of the property.
6) Adjustable Policy: Adjustable policy is issued for a particular
period on the existing stock. The premium amount is paid in full at
the time the policy is taken. Any variation in the value of the stock
covered by the policy is intimated to the insurer by the insured.
The insured, on receipt of such an information, endorses the policy
in accordance with the change intimated and the premium
adjusted. The premium is finally settled at the expiry of the policy.
7) Blanket Policy: Blanket policy is issued to cover more than one
named building or property, or all the contents of more than one
named building. Under such a policy, all the fixed and current
assets of a manufacturer or a trade lying in different buildings can
be covered by one policy at the same premium.
8) Consequential Loss Policy: It is a policy under which the insurer
agrees to indemnify the insured for the loss of profits which he
suffers due to the dislocation of his business caused by fire. It is
also known as loss of Profit Insurance.
9) Valuable Policy: The value of property insured is determined only
at the time of happening of risk. In case of risk, the market value of
property would be the basis for payment of compensation.
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10) Reinstatement Policy: If the insurer undertakes to reinstate
(replace) the insured property in case of risk, it is called as
reinstatement or replacement policy.
11) Transit Policy: It covers risk due to fire during transit. The policy
commences with the loading of goods in the carriage and ends
once the goods are unloaded at the destination.
10.7 FIRE LOSS OF PROFIT INSURANCE
Fire Loss of Profit Insurance (FLOP)
The Consequential Loss (fire) policy covers Loss of Gross Profit and /or
increase in cost of working due to reduction in turnover / output due to
operation of peril covered in the Standard Fire & Special Perils Policy.
The material damage Policy indemnifies the loss to the property insured
due to the operation of insured perils. Even if the coverage is adequate
and the claim settled on reinstatement value basis the insured still has
other losses which may ruin him. These losses are the loss of business
and financial loss as the consequence of operation of the peril and at
times are larger than the material damage loss.
In case of a major fire the insured that has opted for a policy on market
value basis has to contribute a sizeable part of the reconstruction cost
due to:
• Deduction on account of depreciation
• Under insurance if the value at risk is more than the Sum insured
• Items not covered in the policy
• Excess as applicable
In addition to the above exclusion number 9 of Fire policy excludes
“Loss of earnings, loss by delay, loss of market or other consequential or
indirect loss or damage of any kind or description whatsoever”.
Benefits of the Fire Loss of Profit Insurance Policy
Clubbed with the Standard Fire and Special Perils policy, the Fire Loss
of Profit Insurance Policy can offer total protection from losses occurring
due to any perils covered including fire damage, flood etc. The benefits
of the Policy are as follows –
• Protection from loss of net trading profit.
• Standing charges.
• Protection from loss of wages.
• Auditor fees are covered by the insurance policy.
• Increased cost of working.
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The policy also offers Extensions that can cover the following
• Accidental failure of public electricity / gas / water supply
• Damage to customer's premises due to perils covered under Fire
Policy
• Damage to Supplier's premises due to perils covered under Fire
Policy
• Sum Insured and Premium
The Fire Loss of Profit Insurance Policy covers the gross profit of the
indemnity period selected. This indemnity period is the maximum period
required to put the business back into normal operation after damage to
insured property by an insured peril and can vary from 6 months to 3
years.
For indemnity periods up to one year, the annual gross profit should be
selected as sum insured.
The premium on a Fire Loss of Profit Insurance Policy depends on the
annual gross profit, the chosen indemnity period and any selected
extensions.
Exclusions to the Fire Loss of Profit Insurance Policy
• Loss of gross profit due to a peril not covered under the Fire
policy
• Difference between the value of stock at the time of fire and at
the time of subsequent replacement
• Deterioration of undamaged stock after fire
• Cost of documentation for Fire and Loss of Profits claim
• Loss of goodwill
• Third party claims
• Other exclusions stated on the policy
10.8 INTRODUCTION TO MARINE INSURANCE
Trade by sea is one the oldest form of trade that countries have
followed. Transit of goods by sea has various risks associated with it.
Such risks would include, amongst others, the following:
• Losing the ship along with goods that being carried by it.
• Sea Piracy i.e. robbery or criminal violence at sea.
• Loss or damage to goods while goods are on ship
• Delays in transit
These risks gave rise to one of the most important and oldest forms of
Insurance called ‘Marine Insurance’ In the current era, Marine Insurance
is not limited to transportation by sea or inland waters only but also
covers transportation of goods by rail, road, air as well as couriers.
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Marine insurance plays a very important role in the field of overseas
commerce and internal trade of a country.
Marine insurance has been defined in section 3 of the Marine Insurance
Act, 1963:
“A contract of marine insurance is an agreement whereby the insurer
undertakes to indemnify the assured, in the manner and to the extent
agreed, against losses incidental to marine adventure.”
10.9 HISTORY OF MARINE INSURANCE
The Britishers opened general insurance in India around the year 1700.
The first company, known as the Sun Insurance Office Ltd was set up in
Calcutta in the year 1710. This was followed by several insurance
companies from different parts of the world, in the field of marine
insurance.
At the international level, the laws of Marine insurance were derived
from the decisions of the courts and treatises of text writers, until 1906. It
was in 1906 that the laws and the legal principles governing the Marine
insurance contracts were codified in the Marine Insurance Act 1906 in
the U. K. In India the Marine Insurance Act 1906 of UK has been
adapted and enacted, as the Marine Insurance Act 1963. In 1972, the
General Insurance business was nationalized by the Government of
India by forming General Insurance Corporation. This Act is the legal
basis of for deciding the conflicts arising out of almost all Marine
insurance contracts. The principle of indemnity is at the core of the Act,
and so are the other fundamental principles relating to most insurance
contracts. The Indian Marine Insurance Act 1963 covers legalese for the
insurance of cargo, hull and freight, as the main subject matters of
insurance.
Basic features of marine insurance
• The property should be exposed to maritime peril
“Maritime Perils” have been defined to mean the perils consequent
on, or incidental to, the navigation of the sea, that is to say, perils
of the sea, fire, war perils, pirates, rovers, thieves, captures,
seizures, restraints and detainments of princes and peoples,
jettisons, barratry and any other perils which are either of the like
kind or may be designated by the policy.
• The loss should occur consequent to Maritime Adventure
Marine Insurance is a Contract whereby the Insurer undertakes to
indemnify the insured, in the manner and to the extent thereby
agreed, against transit losses, that is to say losses incidental to
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transit. Thus the contract of marine insurance is an agreement
whereby the insurer undertakes to indemnify the insured, in the
manner and to the extent thereby agreed, against transit losses,
that is to say losses incidental to transit.
10.10 TYPES OF MARINE INSURANCE
A. Hull Insurance
The Hull is the basic structure of a Ship. On the Hull the superstructure
is constructed. Thus, as the name suggests, Hull Insurance covers any
loss or damage to ships, tankers, bulk carriers, smaller vessels, fishing
boats and sailing vessels. It covers the insurance of the vessel and its
equipment i.e. furniture and fittings, machinery, tools, fuel, etc. A Hull
Policy may also cover the risk while the vessel is under construction.
Ship-owners, charterers, Shipbuilders, bankers, financiers of Ships or
vessels who have Insurable interest can buy this policy.
Since the goods that are loaded on the ship or any other type of vessel
do not form a part of the basic structure of the ship the loss arising out of
damage of such goods is not covered by Hull Insurance.
B. Cargo Insurance
Cargo means the goods carried on a ship. Thus, as the terms suggests,
cargo insurance is taken in respect of the cargo carried by the ship from
one place to another. This covers goods, freight and other interests
against loss or damage to goods whilst being transported by rail, road,
sea and/or air.
It includes the cargo or goods contained in the ship and the personal
belongings of the crew and passengers. The cargo insurance policy may
be a ‘time policy’ or ‘voyage policy’. When the policy is for a definite
period, it is known as ‘time policy’; If it is for a particular voyage, it is
known as ‘voyage policy’ and there is no time limit. There may be mixed
time and voyage policies. Cargo insurance, accordingly, concerns the
following:
• Export and import shipments by ocean-going vessels of all types,

• Coastal shipments by steamers, sailing vessels, mechanized
boats, etc.
• Shipments by inland vessels or country craft, and
• Consignments by rail, road, or air and articles sent by post.
C. Freight Insurance
Freight is the rent or amount paid for the transportation of cargo. This
insurance provides protection against the loss of freight. Generally, the
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ship-owner and the person receiving the freight is one person. The
freight could be paid in advance or at the destination.
Under the marine law the freight is paid only if the cargo reaches safely
at the destination port. Therefore, if the freight has been paid in
advance, it poses no difficulty. There is a problem sometime when the
freight is payable at the destination and the cargo may get lost during
the voyage and does not reach its destination. In that event the freight is
lost and the shipping company has to bear the cost. In order to
overcome such contingency freight insurance is taken.
For example- The owner of goods is bound to pay freightage, under the
terms of the contract, only when the goods are safely delivered at the
port of destination. If the ship is lost on the way or the cargo is damaged
or stolen, the shipping company loses the freight. Freight insurance is
taken to guard against such risk.
D. Liability Insurance
In this type of insurance, the insurer undertakes to indemnify against the

loss which the insured may suffer on account of liability to a third party
caused by collision of the ship and other similar hazards.
A liability is a legal obligation owned to an individual or

group/organization. For example, in case of collision the liability of the
insured will be to the owner of the other vessel (as well as other
stakeholders depending on the related legal aspects).
Third party is a person or group apart from the two primarily involved in a
situation/transaction, especially in a dispute like collision of the ship with
another ship. It also covers legal liability towards damages to the third
party in respect of accidental death, bodily injury or loss of or damage to
property along with Legal costs and expenses incurred with prior
consent.
10.11 TYPES OF MARINE INSURANCE POLICIES
There are various types of Insurance Policies under Marine Insurance
depending on the duration & type and the nature of the risk that is
covered.
Some of the Marine Insurance policies are:
1. Specific Voyage policy
This is a policy in which the subject matter is insured for a particular
voyage irrespective of the time involved in it.
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In this case the risk attaches only when the ship starts on the voyage.
This policy is valid for a single voyage or transit. The policy will be
issued before the voyage starts. The coverage will cease immediately on
completion of the voyage. The specific voyage policy must show
complete details of the risk. It should contain particulars of
conveyance/Vessel name/ Waybill or Bill of Lading* the date and sum
insured terms and conditions of cover voyage cargo description etc like
all other marine policies.
A waybill or Bill of Lading is a document issued by a carrier giving details
and instructions relating to the shipment of a consignment of goods. It
serves as evidence that the goods were actually shipped. It also gives
the particulars of the cargo.
2. Time policy
This is a policy in which the subject matter is insured for a definite period
of time. The ship may pursue any course it likes; the policy would cover
all the risks from perils of the sea for the stated period of time. A time
policy cannot be for a period exceeding one year, but it may contain a
'continuation clause'. The 'continuation clause' means that if the voyage
is not completed within the specified period, the risk shall be covered
until the voyage is completed, or till the arrival of the ship at the port of
call.
3. Mixed policy
This is a combination of voyage and time policies and covers the risk
during particular voyage for a specified period of time.
4. Valued policy
This is a policy in which the value of the subject matter insured is agreed
upon between the insurer and the insured and it is specified in the policy
itself.
5. Open or Un-valued policy
This is the policy in which the value of the subject matter insured is not
specified. Subject to the limit of the sum assured, it leaves the value of
the loss to be subsequently ascertained. This policy is issued for transit
of goods within India. Policy is valid for one year and all transits during
the policy period and declared are automatically covered by the
insurance company subject to the availability of the overall sum insured.
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6. Open Cover
This policy which is issued for a policy period of one year indicates the
rates, terms and conditions agreed upon by the insured and insurer to
cover the consignments to be imported or exported.
A declaration is to be made to the insurance company as and when a
consignment is to be sent along with the premium at the agreed rate.
The insurance company will then issue a certificate covering the
declared consignment. Open cover is usually issued for import/export.
The open cover is a contract affected for a period of 12 months whereby
the insurance company agrees to provide insurance cover to all
shipments coming within the scope of the open cover. Open cover is not
a policy. It is an unstamped agreement. As and when shipments are
declared, specific policies are issued as evidence of the contract and on
collection of premiums.
7. Floating policy
This is a policy which only mentions the amount for which the insurance
is taken out and leaves the name of the ship(s) and other particulars to
be defined by subsequent declarations. Such policies are very useful to
merchants who regularly dispatch goods through ships.
8. Wagering or Honour policy
This is a policy in which the assured has no insurable interest and the
underwriter is prepared to dispense with the insurable interest. Such
policies are also known as 'Policy Proof of Interest (P.P.I).
9. Special Declaration Policy
This is a form of floating policy issued to clients whose annual estimated
dispatches (i.e. turnover) by rail / road / inland waterways exceed Rs 2
cores. Declaration of dispatches shall be made at periodical intervals
and premium is adjusted on expiry of the policy based on the total
declared amount. When the policy is issued sum insured should be
based on previous year’s turnover or in case of fresh proposals, on a fair
estimate of annual dispatches.
10. Special Storage Risks Insurance
This insurance is granted in conjunction with an open policy or a special
declaration policy. The purpose of this policy is to cover goods lying at
the Railway premises or carrier’s godowns after termination of transit
cover under open or special declaration policies but pending clearance
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by the consignees. The cover terminates when delivery is taken by the
consignee or payment is received by the consignor, whichever is earlier.
11. Annual Policy
This policy, issued for 12 months, covers goods belonging to the
insured, which are not under contract of sale, and which are in transit by
rail / road from specified depots / processing units to other specified
depots / processing units. This policy may be issued to cover goods in
transit by road or rail or sea from specified depots or processing units
owned or hired by the insured. The goods covered must belong to or
held in trust by the insured. These policies cannot be assigned or
transferred. For such policies the sum insured should not be less than
Rs 5,000/-.
12. “Duty” Insurance
Cargo imported into India is subject to payment of Customs Duty, as per
the Customs Act. This duty can be included in the value of the cargo
insured under a Marine Cargo Policy, or a separate policy can be issued
in which case the Duty Insurance Clause is incorporated in the policy.
Warranty provides that the claim under the Duty Policy would be payable
only if the claim under the cargo policy is payable.
This policy also covers loss of custom duty paid in case goods arrive in
damaged condition. This policy can be taken even if the overseas transit
has been covered by an insurance company abroad, but it has to be
taken before the goods arrive in India.
10.12 MARINE CARGO POLICY
Marine cargo insurance is the policy which provides insurance cover to
the goods being carried for trade by the mode of water, air, rail or road.
Marine is directly related to sea ways, but the insurance providers in
India extend this coverage to all the other modes of transport too,
making it a comprehensive policy. Thus, the policy provides financial
protection for the losses incurred during transportation of goods.
Coverage of Marine Cargo Insurance Cover

This type of insurance policy is designed to provide coverage to the
goods being carried by ships, trains, trucks, etc. Loss or damage to the
goods in transit due to following reasons is covered under the policy:
• Fire, explosion
• Vessel getting sunk
• Overturning or derailment of land transport
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• Damage to the goods due to collision
• Earthquake or volcanic eruption
• Water ingression causing damage to the goods
Claim Process for Marine Cargo Insurance
In the case of an unwanted event causing damage to the goods, follow
the steps mentioned below in order to file a claim and obtain the claim
amount:
• Inform the insurance company about the event as soon as you
can
• In case of theft or loss of cargo, make sure to file an FIR and
obtain copy of the same
• A surveyor will be appointed to visit you and the location of
loss/damage
• Submit the documents to the surveyor along with the claim form
Once the documents reach the claim department of the insurance
company, the department initiates the verification process
• On successful verification, you will receive the claim amount
within a span of 30 days
Documents Required for Claim Process
Submit all or some of the following documents to the insurance
provider at the time of filing a claim:
• Claim Form (duly filled & signed)

• Original Policy Document
• Details of the goods damaged/lost
• FIR report (in case of theft)
• Consignment details
• Any other details asked by the provider
• Exclusions under Marine Cargo Insurance
The insurance policy does not provide coverage for certain cases.
These are exclusions. Let us look at some of them:
• Loss or damage to the cargo due to delay
• Damage due to negligence of the crew or labour
• Damage due to improper packing
• Loss due to insolvency of the cargo company
• Note: This is not an exhaustive list.
Advantages of Marine Cargo Insurance
Some of the multiple merits of enrolling in marine cargo insurance are:
Worry-free trading of cargo, thus enabling better trade
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The insurance companies also help in narrowing down the best
transports as this shrinks their liability too, making it a win-win case for
both the parties
One can opt for cargo specific covers and enjoy better coverage at
optimum premium
10.13 MARINE HULL POLICY
Marine hull insurance is a type of insurance policy that covers watercraft
such as a boat, ship, yacht, fishing boat, steamer, and so on. The body
of the vessel is referred to as a hull, and that is exactly what this
insurance policy covers. The insurance provides financial protection in
the event that the vessel’s body (hull) or machinery are damaged as a
result of the hazards covered by the policy.
Marine hull insurance protects boat owners against damage to the hull,
machinery, fittings, and freight, as well as risks such as construction and
ship-breaking, liabilities, disbursement losses, oil and energy-related
hazards, and so on. Yacht insurance, maritime cargo insurance, marine
import transit insurance, marine export transit insurance, and marine
inland transit insurance policies are all examples of specialized marine
hull insurance.
10.14 FEATURES OF MARINE HULL INSURANCE
Here are a few reasons why you must have marine hull insurance if you
are a ship-owner:
• The dangers of travelling by sea are comparable to those of
travelling by land or air. Your ship could be destroyed, lost, or sunk
as a result of a fire, robbery, or collision, and the financial loss
could be catastrophic because marine vehicles are expensive.
Owners of yachts and other pleasure boats, in particular, are in
greater danger because their vessels are expensive and do not
generate a profit. A marine hull insurance policy, often known as
yacht insurance, protects your vessel from sea-related risks.
• Yacht insurance and marine hull insurance policies also cover
damage to other boats and ships caused by your vessel.
• Marine Hull Insurance can be purchased for a specific period of
time or for a specific journey. This means you have the option of
insuring your ship or yacht for each voyage or purchasing a
comprehensive plan that covers your vessel for a set length of
time, such as a year.
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• The sum assured is not a fixed quantity, but rather a value agreed
upon by the insurer and the insured. It is usually equal to or close
to the cost of the vessel in the issue.
• The amount of premium paid to the insurance company is
determined by a number of factors:
✓ The kind of vessel
✓ The vessel’s age is indicated by the number of years it has
been in service.
✓ The cost of a vessel is determined by its valuation.
✓ The vessel’s tonnage and trade limits
✓ The vessel’s management and ownership terms
✓ The type of insurance coverage that is required.
LET US SUM UP
The fire policy does not cover only the loss/damage of fire but also due
to other perils like lightening, storms, strike, aircraft damage etc.
Therefore, the fire policy in India, is known as Standard Fire and Special
Perils Policy. Though these risks are covered yet exceptions are always
there. For the growth of the Indian economy every business organization
should insure its assets. Marine insurance covers the loss or damage of
ships, cargo, terminals, and any transport of cargo by which property is
transferred, acquired, or held between the points of origin and final
destination.
Cargo insurance is a sub-branch of marine insurance, though Marine
also includes Onshore and Offshore exposed property, (container
terminals, ports, oil platforms, pipelines), Hull, Marine Casualty, and
Marine Liability
CHECK YOUR PROGRESS
1. Fire insurance is a contract between the _______
a) Policy Holder And Insurer
b) Share Holder and Insure
c) Investor and Banker
d) Share Holder and Policy Holder
2. Poor relief act was passed in ______
a) England b) India
c) Bangladesh d) Britain
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3. Fire insurance policy containing an average clause is called
the______
a) Average policy b) Time policy
c) Specific voyage policy d) Cargo insurance policy
4. In a marine cargo policy the insurable interest should exist ______
a) at the time of commencement b) at the time of acceptance
c) at the time of claim d)at the time of proposal
Which pone of the following marine cargo policy is not assignable
a) marine cargo specific policy
b) certificate issued under open cover
c) certificate issued made open policy
d) annual policy
GLOSSARY
Fire insurance : A contract of insurance against the loss/damage
by accidental fire or other occurrences customarily
included under a fire policy.
Insurable : The fire insurance will be valid only if the person
Interest who is insuring the property is owner or having
insurable interest in that property
Marine hull : A type of insurance policy that covers watercraft
insurance such as a boat, ship, yacht, fishing boat, steamer,
and so on. The body of the vessel is referred to as
a hull, and that is exactly what this insurance policy
covers
SUGGESTED READINGS
1) M. N. Srinivasan: Principles of Insurance Law, Wadhwa & Co.
2) Rajiv Jain : Insurance Law And Practice, Vidhi Publication Private
Limited
3) George E. Rejda : Principles Of Risk Management And Insurance
4) Dr. Avtar Singh : Law Of Insurance, Universal Publication Pvt.
Limited
5) Insurance Principles And Practice By S.Chan
6) Elements Of Insurance By Dr.A.Murthy
WEB RESOURCES
1. IC 11 Chapter 3- Fire and Marine Insurance Product' Notes -
YouTube
2. Marine Insurance Explained - Understand the Cargo Insurance
You're Getting - Bing video
1.a) 2.a) 3..a) 4.c) 5.d)
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UNIT 11
MOTOR INSURANCE
STRUCTURE
Overview
Learning objectives
11.1 Motor Insurance Policy
11.2 Types of Motor Insurance Policy
11.2.1 Private Car Insurance

11.2.2 Two-Wheeler Insurance
11.2.3 commercial Vehicle Insurance
11.3 Miscellaneous Insurance

11.4 Types of Miscellaneous Insurance Policies
11.5 Loss or Delay of Baggage
11.6 Coinsurance
11.7 Reinsurance
11.7.1 Objective of Reinsurance
11.7.2 Reinsurance Advantages

11.8 Double Insurance
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
This is the class of Insurance through which a majority of the people
recognize general Insurance and that too because it is compulsory for all
motorized vehicles to have an insurance policy against third party liability
before they can come on road. Though this class of Insurance is the
major source of premium earnings for the Insurance companies it is also
the class which is showing the biggest losses. A health insurance policy
extends coverage against medical expenses incurred owing to
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accidents, illness or injury. An individual can avail such a policy against
monthly or annual premium payments, for a specified tenure.
During this period, if an insured meets with an accident or is diagnosed
with a severe ailment, the expenses incurred for treatment purposes are
borne by the insurance provider. Reinsurance means where a risk is
considerable any insurance company would like to insure the risk up to a
certain amount themselves. And put the excess risk out to a re-
insurance company, or to a more than one, on the principle of
diversifying the risk. In this unit, you are going to study the motor,
medical and reinsurance and it related activities.
LEARNING OBJECTIVES
• explain the meaning of Motor insurance and motor vehicle act
1988.
• describe the various types of motor insurance policy
• list out the various Miscellaneous Insurance Policies
• explain the concept of coinsurance, reinsurance, double
insurance
11.1 MOTOR INSURANCE POLICY

Motor Vehicles Act, 1988
It is necessary to have knowledge of Motor Vehicles Act passed in 1939
and amended in 1988. In the old days, many of the pedestrians who
were knocked down by motor vehicles and who were killed or injured,
did not get any compensation because the motorists did not have the
resources to pay the compensation and were also not insured. In order
to safeguard the interests of pedestrians, therefore, the Motor Vehicles
Act, 1939, introduced compulsory insurance.
The insurance of motor vehicles against damage is not made
compulsory, but the insurance of third-party liability arising out of the use
of motor vehicles in public places is made compulsory. No motor vehicle
can play in a public place without such insurance
Certificate of Insurance
The Motor Vehicles Act provides that the policy of insurance shall be of
no effect unless and until a certificate of insurance in the form prescribed
under the Rules of the Act is issued.
The only evidence of the existence of a valid insurance as required by

the Motor Vehicles Act acceptable to the police authorities and R.T.O, is
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a certificate of insurance issued by the insurers. The points covered
under a certificate of insurance differ according to the type of vehicle
insured.
Motor insurance is a unique insurance policy meant for vehicle owners
to protect them from incurring any financial losses that may arise due to
damage or theft of the vehicle. Whether you have a private car, a
commercial vehicle, or a two-wheeler, you can purchase a motor
insurance policy.
So first, let's start with the types of Motor Insurance policies, and by and
large what they cover! Motor insurance can be classified on 2 things
• The type of vehicle for which you are taking insurance
• The amount of coverage that you want to cover your vehicle for
So, what are the different types of vehicle insurances in India based on
the type of vehicle owned?
Introduction
Auto insurance (also known as car insurance or motor insurance) is

insurance purchased for cars, trucks/lorries, motorcycles, and other road
vehicles. Its primary use is to provide financial protection against
physical damage and/or bodily injury resulting from traffic collisions and
against liability arising out of the use of the vehicle in a public place.
Broadly there are two types of insurances policies that offer auto
insurance cover:
a) Liability Only Policy (Statutory requirement): The owner of the
vehicle is legally liable for any injury or damage to third party life or
property caused by or arising out of the use of the vehicle in a
public place. Driving a motor vehicle without insurance in a public
place is a punishable offence in terms of the Motor Vehicles Act,
1988.
b) Package Policy (Liability Only Policy + Damage to owner’s Vehicle
usually called O.D Cover)
Here it is important to note that if somebody takes only a Liability Only
Policy, damage tohis/her vehicle will not be covered. Hence, it would be
prudent to take a Package Policy which would give a wider cover,
including cover for the vehicle.
A motor policy is usually valid for a period of one year and has to be
renewed before the due date.
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Covers under Auto Insurance
The damages to the vehicle due to the following perils are usually
covered under Motor Insurance policy:
1) Fire, Explosion, Self- Ignition, Lightning
2) Burglary/Housebreaking / Theft
3) Glass damage (such as a broken windshield)
4) Damage sustained from hitting an animal or bird
5) Riot & Strike
6) Earthquake
7) Flood, Storm, Cyclone, Hurricane, tempest, inundation,
hailstorm, frost
8) Accidental external means
9) Malicious Act
10) Terrorism acts
11) While in Transit by Rail/ Road, Inland waterways, Lift, Elevator or
Air
12) Land slide / Rock-slide
13) Damage to Third party.
11.2 TYPES OF MOTOR INSURANCE POLICY

11.2.1 Private Car Insurance
This is motor insurance that needs to be taken for any private car owned
by an individual and is mandated by the Government of India. It covers
the vehicle for damages against accidents, fire, natural disasters, theft
among others and also covers for any injury to the owner. It also covers
any damages and injuries caused to the third party.
11.2.2 Two-Wheeler Insurance
This insurance policy covers two-wheelers like a scooter or a bike and is
mandated by the Government of India. The two-wheeler is covered
against damages from accidents, disasters, fire, theft, etc. as well as any
damages and injuries to the third-party. It also offers a mandatory
personal accident cover for the owner rider and can be taken for
passengers too
11.2.3 Commercial Vehicle Insurance
This insurance covers all vehicles that are not used for personal use. his
type of insurance covers all those vehicles which are not used for
personal purpose. Trucks, buses, heavy commercial vehicles, light
commercial vehicles, multi-utility vehicles, agricultural vehicles, taxi/cab,
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ambulances, auto-rickshaw etc. are some vehicles that are covered
under this insurance.
11.3 MISCELLANEOUS INSURANCE
Includes insurance against loss from damage done, directly or indirectly
by lightning, windstorm, tornado, earthquake or insurance under an open
policy indemnifying the producer of any motion picture, television,
theatrical, sport, or similar production, event, or exhibition against loss
by reason of the interruption, postponement, or cancellation of such
production, event, or exhibition due to death, accidental injury, or
sickness preventing performers, directors, or other principals from
commencing or continuing their respective performance or duties; and
any insurance not included in any other classes and which is a proper
subject of insurance
Who Needs Miscellaneous Insurance?
After all of this time nurturing your dream business or career, you finally
turned it into a full-time, money-making opportunity. That’s an
accomplishment you deserve some real credit for. So, kudos. But once
you’ve gotten a taste for running the show and making good money, it’s
hard to imagine anything else, ever again. Protecting your business is
important. It’s your livelihood after all, and your pride and joy. If you’re
trying to decide whether a Miscellaneous insurance policy is necessary,
ask yourself these questions:
Do I offer paid services or advice?
Do I hire contractors who act on my behalf?
Have I signed a confidentiality or business agreement with my client?
If you answered “yes” to any of the above questions, it’s probably in your
best interest to consider a Miscellaneous insurance policy. A doctor
wouldn’t perform open heart surgery on a patient without Malpractice
insurance, would they? Nope. That would be crazy. So why would you
conduct business without your own legal protection? Here’s a few
examples of professionals that should definitely consider a
Miscellaneous insurance policy:
• Outsourced Payroll Processors
• Graphic Design Artists
• Tutors
• Public Relations Specialists
• Property Managers
• Interior Designers
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• Architects
• Small business owners (more on that later)
The list could go on. If you’re a consultant, for example, or a travel agent
or an event planner, there’s going to be some sort of risk or liability
involved. Your customers can sue you for errors and omissions. Things
get even scarier for professionals who deal with finances and
confidentiality: mortgage lenders, accountants, insurance agents, etc.
Really, this type of insurance is necessary for almost any professional
contractor. Any error or negligent act made by you or someone
representing you can amass an avalanche of unwanted consequences.
Accidents happen.
For Example: An engaged couple scours the internet for a local wedding
photographer. After reading countless reviews and clicking through
portfolios, they settle on a photographer whose artistic eye stands out
above the rest. It’s a bit of an investment, but they schedule a
consultation and after a great conversation, decide to put down a
deposit.
11.4 TYPES OF MISCELLANEOUS INSURANCE POLICIES
1) Burglary Insurance Coverage

2) Cash in transit and Cash in safe
3) Fidelity Guarantee
4) Group Personal Accident
5) Group Health Insurance
1) Burglary Insurance Coverage
The Policy covers against loss or damage by Burglary House Breaking
(i.e theft following upon actual, forcible & violent entry of &/or exit from
the premises including Holdup risk, in respect of contents of offices,
warehouses, shops, etc. & cash in safe or strong room & also damage
caused to the premises.
Exclusions
The policy does not cover loss or damage arising from war & war like
operation, Riot & Strike, Civil Commotion, Terrorist activities convulsion
of nature & consequential loss by use of the keys to safe unless
obtained by force or threat, caused by Insured’s employees or member
of the family.
Property Covered
Property whilst contained in the premises, which includes a) Stock in

Trade i.e. your property pertains to the Business or Occupation. b)
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Goods held in Trust or commission for which you are responsible, c)
Furniture, fixtures, fittings, utensils and appliances in Trade, d) Money in
locked safe, e) All other contents unless specifically declared for
insurance.
Property not covered
Goods or silver articles, watches or jewellery or precious stones or
models or coins or curios, sculptures, manuscripts, books, plans,
medals, moulds, designs deeds, bonds, bills of exchange, bank, treasury
or promissory notes, cheque, money other than in the locked safe,
securities, stamps unless specifically insured
2. Cash in transit and Cash in safe
Enterprises that require to transport or hold large amounts of cash as
part of the business process are often hesitant to do so due to security
concerns. However, specific insurance coverage can be taken for loss of
cash, currency notes, coins, securities and cheque – both whilst in
transit and/or in a locked safe on your premises. However, some policies
will not extend to loss of cash entrusted to unauthorized persons or due
to fraud, dishonesty, riots or terrorist activities. In case of Cash-in-transit
Insurance, details of the mode of conveyance, manner of transport,
nature of cash receptacle, presence of armed guards etc. will have to be
provided to the insurer. Other details like maximum amount carried in a
single transit, location of destination and route will also need to be
conveyed. Additional coverage may also be sought for loss sustained
due to damage to safe containing the cash whilst in transit.
Cash-in-safe Insurance pertains to money stored in a locked and
secured storage facility on your premises. The insurer will need to
ascertain the nature of business transactions that occur in the premises
to determine the volume of cash requiring coverage. Details of number
of keys and their possessors and security measures against burglaries
and hold ups will also need to be given. Separate coverage may be
sought for loss of cash by armed robbery during working hours and loss
of cash during non-business hours.
3. Fidelity Guarantee
Although all companies aim to employ the best talent, this is not always
possible. You need to protect your business against financial losses
caused by dishonest employees who are aware of internal weaknesses.
Such insurance should ideally cover theft of money or securities,
fraudulent conversion, embezzlement, forgery, burglary, counterfeiting,
and computer / wire transfer fraud.
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Specific protection may also be taken for crimes committed by
employees in the course of performance of their duties. This is ideal for
cashiers and storekeepers – employees in positions of trust.
Types of fidelity policies:
•Individual policy – guarantee for one individual
•Collective policy / Floating policy: for the entire staff or select
number of employees
• Position Policy: For positions / designations rather than
individuals
4. Group Personal Accident
Group Personal Accident Insurance is an umbrella policy that covers any
specific group of people insured against any bodily injury solely &
directly from accident caused by external violent and visible means then
Insurance Company shall pay to insured or his legal personal
representatives as the case may be the sum or sums insured. Aside
from physical injuries, uncertainty and depression may prevent you from
going to work, leading to loss of income.
Benefits covered:
• Accidental Death
• Loss of limbs and eyes and
• Permanent partial / total disablement
• Temporary partial / total disablement. (at 1% of CSI upto 100
weeks
• The policy can be extended to include medical expenses to the
extent of 40% of the valid claim amount by paying additional
premium.
Group policies may be sought by any employer for employees or as a
family package. Additionally self-inflicted damage such as drug / alcohol
rehabilitation would also not be covered. Coverage is provided according
to risk classification. This is generally attained by examining your
professional work environment and lifestyle. Accountants, teachers and
doctors would be in a different category from those involved in manual
labor and vehicle drivers. Naturally, voluntary participation in physically
endangering activities, such as adventure sports / extreme motor sports
would result in different risk classifications.
Mediclaim policy is similar to health insurance and covers medical
expenses of the insured in case of health emergencies. The chosen
insurer will pay for the treatment required for illness or accident up to the
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chosen sum insured. It also covers the hospitalization expenses, which
include day-care treatment, room rent, in-patient cover, to name a few.
Mediclaim Policy Vs. Health Insurance – Comparison
Parameter Mediclaim Policy Health Insurance
Benefit Reimburses or pay for Covers medical expenses

the actual medical incurred, in addition to
treatment expenses expenses related to
incurred during in-patient hospitalization, such as
hospitalization only OPD expenses, day-care
treatment expenses, etc.
Scope Narrow Comparatively wider
Premium Low because of limited Higher than mediclaim

cover because of extensive
coverage
Add-ons Not available Available
5. Group Health Insurance

Group Mediclaim Policy:
Any Group/Association/Institution/Corporate body of more than 50
persons can take a group mediclaim policy. In essence a group health
insurance policy is an insurance cover applied for by the employer, with
the Insurance Company. The employer would usually bear the entire
premium or only a part of it.
Coverage:
Hospitalization expenses incurred within the country, due to
illness/disease &/or due to accident during the Policy period.
Room, Boarding expenses as provided by the Hospitalization/Nursing
Home, and Nursing Expenses. Surgeon, Anesthetist, Medical
Practitioner, Consultants, Specialist Fees Anesthesia, Blood, Oxygen,
Operation Theatre Charges, Surgical Appliances, Medicines and Drugs,
Diagnostic Materials and x-ray, Dialysis, Chemotherapy, Radiotherapy,
Cost of Pacemaker, Artificial Limbs and Cost of Organs and similar
expenses.
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11.5 LOSS OR DELAY OF BAGGAGE
Some of the most common and annoying holiday disasters involve
personal possessions, such as delayed /lost baggage, lost passports
and damaged gadgets. Loss of baggage or documents can seriously
upset your travel plans but with an appropriate travel insurance plan, you
can have some peace of mind. Travel insurance provides you coverage
for loss of baggage, delay of baggage, loss of passport etc up to a
specified limit mentioned in the policy document.
Loss of Checked in Baggage Coverage can reimburse you for your
personal belongings if your luggage is lost, stolen or damaged.
Coverage for loss of your baggage and personal effects can be
purchased as part of a comprehensive travel insurance plan. This type
of travel insurance coverage provides reimbursement for luggage as well
as for any items of yours that are lost or stolen while you're traveling.
Many a times, the baggage can be lost en route, or get stolen from the
airport baggage carousel. It can fall off while loading and none of the
airlines staff notices it. Travel insurance policies that offer coverage for
loss of baggage and/or personal effects have specified limits on the
amount of money to which you'll be entitled if you need to file a claim.
Baggage Delay Coverage provides money to buy essential items until
your delayed bags arrive, such as a toiletry kit, medicines, or another
change of clothes.
This coverage is intended to provide for the essentials in case of a delay
in receipt of the checked-in baggage. This coverage starts when your
bags have been delayed a certain number of hours (usually between 12
and 24).
While there is also travel insurance coverage available for loss of
baggage or if you had your personal items stolen, baggage delay
coverage is an additional coverage that may be there in a travel
insurance Comprehensive Plan.
Some Important Points about Baggage Delay Coverage-

• It is a secondary coverage to any benefits your airline or common
carrier may provide to you.
• The items you purchase must be reasonable essential items.
Incurred expenses must be verifiable, so keep your receipts and
take pictures of the items you buy to carry you over until your
luggage arrives.
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• Baggage delay coverage doesn't provide protection when you
reach your final destination or place of residence.
11.6 COINSURANCE
Coinsurance refers to a percentage of medical expenses the insured
must pay after the clearance of deductible. This certainly helps share the
payment burden between the insured and the insurer. Moreover, the
coinsurance meaning implicates splitting total applicable medical costs
between the insured and insurer.
Co-insurance is a clause used by insurance companies on policies
covering property such as buildings, contents, stock, or industrial
equipment. This clause makes sure policyholders insure their property to
an appropriate value and that the insurer receives a fair premium for the
risk, whether on a replacement cost basis or on an actual cash value
basis (subject to depreciation). The co-insurance clause can also be
found on business interruption policies where it ensures that
policyholders insure their revenue stream to an appropriate value.
Generally, co-insurance is expressed as a percentage. The most
common clauses require policyholders to insure to 80%, 90%, or 100%
of the true value. For instance, a building valued at 1,000,000
replacement value with a co-insurance clause of 90% must be insured
for no less than 900,000. The same building with an 80% co-insurance
clause must be insured for no less than 800,000.
11.7 REINSURANCE
A reinsurance, in its most basic sense, is insurance for insurers. It is the
process through which insurers minimise the possibility of paying high
amounts of money, in case of an insurance claim, by transferring a part
of their risk portfolio to other parties.
But, to understand reinsurance better, let us first look at a more familiar
term — Insurance. By definition, insurance means — “an arrangement
by which a company or the state undertakes to provide a guarantee of
compensation for specified loss, damage, illness, or death in return for
payment of a specified premium.”
This means insurance of insurance. The original insurer gets the risk,
assumed from the original insured (primary insured), and covered
(reinsured) with another insurer (known as reinsurer) for the same
reason as the primary insured does.
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The primary insurer, here, in fact, becomes the insured (known as
reinsured), and the person or body or company giving him the protection
becomes the insurer (known as reinsurer).
11.7.1. Objective of Reinsurance
The objective of the reinsurer is very similar to that of any insurance
provider. It gives the insurer the surety that no matter what happens, you
are insured.
Following are the objectives of reinsurance
• Risk is distributed to guarantee that a claim is covered.
• It gives a high level of underwriting stability during the claim
period.
• Financial obligations that exceed the insurance firm’s capability
are outsourced to another company with the necessary
resources. As a result, the ceding business is only left with the
financial responsibility that it can meet.
• Profiting from a premium on the net amount.
• To settle their claims, the real insured individual must work with
just one insurance provider.
• Enhance the risk exposure capacity.
11.7.2 Reinsurance Advantages
Apart from the main risk-bearing advantage. Following are the main
advantages of reinsurance.
• Insurance funds protected: In the case of reinsurance, the
insurance funds are protected and kept safe in case of any
unforeseen claim. It also helps the insurance company manage
their funds better.
• Encourages new underwriters: Having reinsurance
encourages insurance companies to have new underwriters.
Which further leads to an increase and expansion in business.
• It provides a limit on the quantum of liabilities: By sharing the
risk, the reinsurance also helps in reducing the size and number
of liabilities that any insurance company has to bear. Which also
helps in bettering the operations of the said insurer.
• It further increases the goodwill of the main insurer: A
reinsurer helps in building goodwill for the insurance company.
The better the claim settlement, the better the business in the
future as a rule.
• Stability to profits: With the addition of a reinsurer, profit is
stable for insurance companies.
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11.8 DOUBLE INSURANCE
Double insurance refers to insurance where the same subject matter is
insured twice or more than that. In such scenarios, the same subject is
insured but with different insurance companies. The concept of Double
insurance is not illegal at all. Double insurance come to light when a
business avail insurance w.r.t the same risk and subject matter from two
different insurers. This write-up will explore different instances where
double insurance may occur and the real-life implications for businesses
Imagine a situation where both you and your wife hold insurance for your
house at the same time. You're not trying to cheat the insurance
companies, but you've decided to have two policies on the same
property so that you can be guaranteed to get some form of
compensation. After all, if one company hesitates in paying out, then you
can turn to the other for compensation. This is called double insurance.
So, with double insurance the insured person will not get more money.
The biggest question is which insurer will pay the compensation. It's
easy to imagine two insurers arguing about who will pay, but in reality, it
is much more straightforward. The insured person, or simply the insured,
can choose either of the two companies to claim compensation from.
The second insurer (who hasn't yet paid out) will still need to pay a share
to the company that has paid out.
General principles of Double Insurance

The first point on concurrent insurance is that, in principle, a business
entity should not be left without an insurance payment. Where there is a
presence of double insurance, & a business entity intends to claim w.r.t
a loss covered by more than one policy, it will be entitled to claim
whichever insurance policy it prefers.
The insurance company that does not dispense cover w.r.t the double
insured risk can approach other insurers for the contribution which has
rendered similar cover.
Therefore, if a business does claim under one insurance policy & not the
other, the insurance company that has not paid out probably has to pay
a share to the insurer who has paid out.
LET US SUM UP
You have learnt about the general insurance including motor, marine,
miscellaneous, reinsurance, double insurance and coinsurance.
Reinsurance should not be confused with double insurance and co-
insurance. Double insurance happens when the same subject matter,
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whether life or property, is insured by two or more insurance companies
while co-insurance is when the policyholder or the insured shares the
cost with the insurance company according to some fixed percentage
CHECK YOUR PROGRESS
1. Motor vehicles act was passed in
a)1939 b)1949
c)1959 d)1969
2. AUTO insurance is also called ______
a) Car insurance b) Life insurance
c)Marine insurance d) General insurance
3. A motor policy is usually valid for a period of ______
a) one year b) two years
c)three years d) four years
4. Motor insurance provides insurance cover to
a) private vehicles b) commercial

c)motorcycles d) all of these
5. Grievous hurt under the motor vehicle act 1998 means ______
a) Grievous hurt is defined in Indian penal code
b) Grievous hurt is detected by medical practitioner
c) Grievous hurt is defined in medical laws
d) None of these
GLOSSARY
Motor Vehicles Act, : It is necessary to have knowledge of Motor

1988 Vehicles Act passed in 1939 and amended
in 1988.
Coinsurance : a percentage of medical expenses the

insured must pay after the clearance of
deductible. This certainly helps share the
payment burden between the insured and
the insurer.
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Reinsurance : Reinsurance, in its most basic sense, is
insurance for insurers. It is the process
through which insurers minimise the
possibility of paying high amounts of
money, in case of an insurance claim, by
transferring a part of their risk portfolio to
other parties.
Double insurance : Double insurance refers to insurance where

the same subject matter is insured twice or
more than that. In such scenarios, the same
subject is insured but with different
insurance companies
SUGGESTED READINGS
Limited
Limited
6) .Elements of Insurance by Dr.A.Murthy
WEB RESOURCES
1. Motor Insurance / Consumer Mathematics / KSSM Form 5
Chapter 3 - Bing video
2. IC 11 Chapter 4- Motor and Personal Liability Insurance' Notes -
Bing video
3. The Motor Insurance Twist - Bing video
1.a) 2.a) 3.a) 4.d) 5.a)
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UNIT 12
PROCESS OF GENERAL INSURANCE
STRUCTURE
Overview
Learning Objectives
12.1 Cover Notes
12.2 Certificate of Insurance (CoI)
12.2.1 Acord Certificate of Insurance Sample

12.2.2 Types of CoI
12.2.3 Uses of CoI
12.2.4 Importance of Certificates of Insurance
12.3 Open Policy (OP)
12.4 Floater Insurance
12.5 Claim Excess or Claim Franchise
12.6 Salvage or Scrap
12.7 Total Loss or Constructive Total Loss
12.8 Valued Policy
12.9 Agreed Value Insurance
12.10 First Loss Policy
12.11 Increased Value Insurance

12.12 Insurance Time or Institute Cargo Clauses
12.13 Solatium
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Insurance cover note is a document used to provide evidence of

insurance if policy documents are not immediately available it issues as
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a temporary cover during negotiation period pending finalization of the
matter. A certificate of insurance (COI) is issued by an insurance
company or broker. The COI verifies the existence of an insurance
policy and summarizes the key aspects and conditions of the policy.
Constructive Total Loss This usually happens when the cargo needs to
be abandoned as it is not commercially viable to retrieve them. An
insurance policy in which the amount payable in the event of a valid
claim is agreed upon between the company and policyholder when the
policy is issued and is not related to the actual value of a loss. In ‗Hit
&Run‘cases, accident victims are eligible for compensation through a
Special Fund constituted in terms of Section 163 of the Motor Vehicles
Act, 1988 called ‗Solatium Fund‘. You are going to learn the abovesaid
concepts in details.
LEARNING OBJECTIVES
• gain knowledge in certificate of Insurance, open policy and

floater insurance.
• explain about the claim of insurance, salvage value, loss
calculation and valued policy
• describe the cargo clause and solatium in the marine insurance
12.1 COVER NOTES
Insurance cover note is a document used to provide evidence of

insurance if policy documents are not immediately available it issues as
a temporary cover during negotiation period pending finalization of the
matter.
Since the preparation of a permanent policy might take some time and
since the pending issuance of the policy insurers might like to make
further queries pertaining to the risk or proposed insurance, it has
become a common practice for insurers to issue a temporary cover
during negotiation period pending finalization of the matter.
The cover may be given either by a letter or through a standard cover-
note form. The cover is usually given for 15 days, or 30 days and the
period is mentioned in the document.
The issuance of such a temporary cover does not put the insurers under
an obligation to enter into a permanent contract.is also indicated that if
the insurers are to enter into a permanent contract, it would be as per
insurers’ standard form of policy used for that class.
The information that would usually appear on a cover note is;
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1) Name, address, and occupation of the insured.
2) Sum-insured and provisional premium.
3) Date and time of the commencement of cover.
4) Duration of cover,
5) The scope of cover, i.e., perils covered,
6) Description of the property or subject-matter covered.
7) Cancellation provision which provides that either of the parties may
cancel the cover by giving a written notice within a prescribed time.
8) A statement usually appears at the bottom of the cover note
indicating that the insured is held covered as per usual terms and
conditions of the company’s standard policy form used for this class
of business,
9) Signature and date of the insurer.
The learner should note that a motor cover note will contain some
additional information, as is required by law, such as,
a) use of the vehicle,
b) registration number of the vehicle and
c) a certificate from the insurer to the effect that the cover has been
given in accordance with the provision of the Motor Vehicles Act,
1939.
12.2 CERTIFICATE OF INSURANCE (COI)
A certificate of insurance (COI) is issued by an insurance company or

broker. The COI verifies the existence of an insurance policy and
summarizes the key aspects and conditions of the policy. For example, a
standard COI lists the policyholder's name, policy effective date, the type
of coverage, policy limits, and other important details of the policy.
Without a COI, a company or contractor will have difficulty securing
clients; most hirers will not want to assume the risk of any costs that
might be caused by the contractor or provider.
Certificates of Insurance is used in situations where liability and
significant losses are of concern and require one, which is most
business contexts. What is a certificate of insurance used for? Small-
business owners and contractors often have a COI granting protection
against liability for workplace accidents or injuries. The purchase of
liability insurance will usually trigger the issuance of an insurance
certificate.
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12.2.1 ACORD Certificate of Insurance Sample
It may be helpful to take a look at a blank ACORD form, or other sample
COI form. This might also include a sample certificate of insurance with
additional insured information.
There are a lot of boxes out on this form. Whether you’re reviewing a
certificate issued by your agent or broker you will want to confirm the
following:
You need to make sure your general liability insurance is listed. This
typically includes the per occurrence limit and the aggregate limits of the
policy.
You also need to confirm the policy number. This includes the policy
effective date and the policy expiration date.
If you have automobile liability insurance, you need to include this as
well. Again, make sure you confirmed the policy number, effective date,
and expiration date.
If you have workers’ compensation and employers t liability insurance,

you should include all of this information as well. This includes the policy
number, effective date, and expiration date.
You may also have an umbrella or excess insurance policy. An umbrella

or excess policy is a policy that kicks in if you exceed the maximum
liability on some or all of the underlying insurance policies.
12.2.2 Types of COIs
The most common type of COI is provided in a document called
ACCORD 25. This document comes in a standardized template to
represent each type of insurance policy. The ACCORD 25 form lists the
name of the policyholder and any additional insured. There are 3 main
types of COIs. They each provide different levels of protection based on
the coverage you need for your business.
a) Certificate of Liability Insurance: This should protect the project
owner, the project manager, and a lender if applicable. Your
certificate of liability insurance should include the names of all
insured parties, a description of the type of work you do, and a
waiver of subrogation.
b) Certificate of Worker’s Compensation Insurance: Workers’
compensation insurance provides coverage for employees in the
event they’re injured while working on a project. Workers’
compensation laws vary from state to state, and the document
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should be written to comply with the laws in the state the project is
completed.
c) Certificate of Auto Liability Insurance: In Massachusetts, all
drivers are required to purchase auto insurance with liability
coverage. Commercial auto insurance may also cover employees
that drive company or personal automobiles as part of their job. A
certificate of auto liability insurance should be examined to find all
owned, leased, non-owned, and hired vehicles are protected by the
policy.
12.2.3 Uses of COI
Small-business owners and contractors often have a COI granting
protection against liability for workplace accidents or injuries. The
purchase of liability insurance will usually trigger the issuance of an
insurance certificate. A business owner or contractor may have difficulty
winning contracts. Because many companies and individuals hire
contractors, the client needs to know that a business owner or contractor
has liability insurance so that they will not assume any risk if the
contractor is responsible for damage, injury, or substandard work.
12.2.4 Importance of Certificates of Insurance

1) Proof of Insurance Status
This is the summary of the insurance policy with an effective date
and policy holder‘s name. Hence, it serves as proof of whether or
not insurance is the effect.
2) Quick Access to Information
This is the abridged version of the entire insurance policy. Hence, it
conveniently provides quick access to the required information.
3) Transfer of Liability
The hiring company can comfortably reduce its risk liability by
collecting the certificates from the third-party contractors. In this way,
the hiring company can transfer the loss to the third party‘s insurer in
case something goes wrong.
12.3 OPEN POLICY (OP)
A type of insurance policy intended to cover and indefinite number of
future individual requirement. The insurance contract remains in force
until cancelled. Under the open policy, individual successive shipments
are periodically reported or declared to the insurer and automatically
covered on or after the inception date. Open policies can provide
efficiency and savings for all parties concerned, especially when the
insured conducts a significant volume of highly similar transactions.
Some letter of credit transactions requires evidence of an individual
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policy covering the specified shipment. In such cases it has become the
practice to use an insurance certificate, insurance certificate, insurance
certificate, open marine cargo insurance policy.
12.4 FLOATER INSURANCE
Floater insurance is a type of insurance policy that covers personal
property that is easily movable and provides additional coverage over
what normal insurance policies do not. Also known as a “personal
property floater,” it can cover anything from jewelry and furs to
expensive stereo equipment.
Here are some key items that floater insurance covers:
• Fine Art—Such things as antiques, books, china, crystal,
collectibles, fine arts, furniture, glass, lithographs, mirrors, rugs,
tapestries, paintings, pictures, sculptures, and silverware
• Firearms—Both antique and modern
• Cameras—Cameras of any type, projectors, and audio-visual
equipment for personal use only, not professional use
• Sporting Equipment—Golf, surfing, tennis, or other types of
equipment for personal use only, not professional use
• Musical Instruments—Pianos, guitars, electronics, and other
types of music equipment for personal use only, not professional
use
• Postage Stamps—Postage stamps and related items
• Collections—Collectible coins (including gold and silver), baseball
cards, comics, LPs and CDs, and other collections
12.5 CLAIM EXCESS OR CLAIM FRANCHISE
1. Claim excess
By accepting the benefits of this Agreement and the other First Priority
Security Documents, each First Priority Secured Party hereby (a)
authorizes the First Priority Agent to enter into this Agreement and to act
on its behalf as collateral agent hereunder and in connection herewith
and (b) agrees to be bound to the terms hereof to the extent that it holds
any Excess Claims.
Following the occurrence of the Discharge of First Priority Claims and
prior to the Discharge of Second Priority Claims, if any Person that holds
Excess Claims, at any time, receives any proceeds of any such
insurance policy or any such award or payment, it shall transfer and pay
over such proceeds to the Second Priority Agent in accordance with
Section 4.02(b).
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After all such costs and expenses have been paid in full in cash, the
Discharge of First Priority Claims has occurred, the Discharge of Second
Priority Claims has occurred and all Excess Claims have been paid in
full, any surplus Shared Collateral or proceeds then remaining shall be
returned to the applicable Grantor or to whomsoever may be lawfully
entitled to receive the same or as a court of competent jurisdiction may
direct.
The Email address is not the Mailing Address Escrow Amount is the
amount for which an escrow account is required to be established in
order to satisfy one or more Excess Claims.
2. Franchises Claim
The franchise cover is a type of threshold used in reinsurance contracts
to limit the amount of reinsurance provided to a ceding insurer.
Insurance contracts often require the insured to retain losses up to a
certain threshold, with the insurer only covering losses that exceed this
threshold.
As a prospective franchisee, you want to know how much money you
can expect to generate from the franchise business in which you are
investing. A franchise earnings claim is any information provided to a
prospective franchisee that allows that individual to predict the earnings
or revenue that he/she can generate from the franchise business.
12.6 SALVAGE OR SCRAP
Salvage or scrap refers to the amount for which an asset can be sold at
the end of its useful life or after it is damaged beyond repair. This comes
into play during the claims process of many property insurance policies -
but only when the claim is payable as per the policy terms & conditions.
Let’s examine this in detail below.
Insurance is designed to provide individuals and businesses with a
monetary pay-out in the event of any loss or damage to their insured
property during the policy period. Assets like vehicles, plant and
machinery, buildings, cargo, etc. can be insured against a number of
risks such as fire, collision, natural calamities, malicious damage, etc.
In the event of a loss to such property, the insurance company sends a
claims adjuster or surveyor to ascertain the degree and value of
damage. It is during this claims process that the concept of Salvage
comes into the picture.
The loss ascertained by the insurance company’s claims team can

either be:
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Partial loss - When the property is partially damaged (the actual
loss/damage to the property is less than the maximum Sum Insured),
and the property can be brought back to its previous condition with the
help of necessary repairs; or
Total Loss - When the property is completely damaged and there is no
scope of any repairs, the only option available is replacing the old
property with a new equivalent property
Constructive Total Loss - This is a peculiar situation which arises in
quite a few claims, wherein the property is damaged and can still be
repaired, however the quantum of damages is such that the actual repair
cost far exceeds the maximum sum insured of that property in the policy.
In such a case, replacement of damaged property with a new similar
property becomes more cost effective
12.7 TOTAL LOSS OR CONSTRUCTIVE TOTAL LOSS
1. Actual Total Loss
Actual total loss is a loss that occurs when an insured property is

destroyed or damaged to such an extent that it can be neither recovered
nor repaired for further use. Often, an actual total loss triggers the
maximum settlement possible according to the terms of the insurance
policy.
Actual total loss is also known as "total loss." Sometimes, people will
refer to a piece of property that cannot be salvaged as "totaled."
Occasionally, property covered by insurance can become destroyed or
damaged to such an extent that it can no longer be used or reasonably
salvaged. Whether it was caused by theft, natural disaster, an accident
of some sort, or something else, the insured party should qualify to
receive a payout from the insurance company for the insured value of
the property.
Example of Actual Total Loss: Suppose there’s a hurricane heading
for the coast of North Carolina. Hurricane Widget is a Category 5 storm
and has been causing storm surges up to 15 feet high as it travels up
the coast. Unsurprisingly, it wipes out numerous houses, including one
owned by Bob and Sharon. All that remains of Bob and Sharon’s home
is stilts on the beach, meaning the property qualifies as an actual total
loss
2. Constructive Total Loss
Constructive total loss refers to damage to property that is calculated to

be greater than the insurance limit when reviewing restoration or repair
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as options. It might even be assessed that the cost of restoration or
repair can exceed the value of the property.
For example, a house is damaged by fire and when insurance
investigators come in, they assess the situation in light of eventual
claims and find out that the materials needed to repair the damage or
restore the property are currently priced that they exceed the insurance
limit.
An example can also be seen in auto insurance. If a car is in an accident
and the damage is such that it might cost more than buying a new one, it
may be deemed a constructive total loss. Predictably, the damage is
more than what the insurance can cover.
12.8 VALUED POLICY
A valued policy is a type of insurance policy in which the full face value
of the policy is paid out in the event of a total loss, regardless as to the
actual value of the property covered by the policy. Life insurance policies
are classically valued policies, and people may also purchase valued
policies for property such as homes and vehicles. Many insurance
companies offer valued policies to their customers, with premiums which
can vary, depending on the value of the policy, the risks, and the region
in which the policy is purchased.
The value of certain pieces of property can change significantly over
time. For example, pieces of artwork, jewelry, precious metals, and so
on, may all increase or decrease in worth dramatically, depending on
market conditions. The draw of a valued policy lies in the fact
policyholders do not have to prove the extent of loss and will receive a
specific benefit following a covered loss, no matter what their property's
current value is. However, this also means the policyholder risks losing
out money on items that have appreciated in value. Nevertheless, it is an
alternative to insurance contracts, such as actual cash value policies,
that only cover the current value of the items in question.
12.9 AGREED VALUE INSURANCE
Most car insurance companies determine the cost of your car insurance
policy based on the vehicle’s actual cash value. Sadly, cars start
depreciating the minute you drive them off the dealer lot. That means
you could face a loss if you total your car in an accident. However, with
agreed value car insurance, you will receive compensation based on the
value of your car that you and the insurance company agreed to when
you purchased coverage.
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With an agreed value insurance policy, you and your insurer agree on
the value of your car, which is the maximum amount the insurer will pay
in the event of a covered loss. If you have a claim, you have the option
of receiving either the full cost of repairs or the agreed-upon value.
Insurance policies with an agreed-upon value are uncommon. Most
drivers buy agreed value car insurance for covering a classic car, an
antique car, or a car projected to appreciate value rather than
depreciate.
Obtaining this type of coverage differs from buying a standard actual
cash value (ACV) policy or stated value coverage in a few ways. First
and foremost, you’ll need to submit a statement of property value, which
explains how much your car is worth and why it’s worth that much.
Premiums for agreed value insurance policies are typically more
expensive than an ACV car insurance policy. Here are some of the
factors that car insurance companies look at to determine the cost of
agreed value insurance:
• Your vehicle: The specifics of your vehicle, like the age, make and
model will impact the cost of agreed value insurance.
• Your mileage: If your vehicle is used as a daily driver, your agreed
value insurance premium will likely be more expensive due to the
increased risk of a claim.
• Where the vehicle is stored: Storing your vehicle in a garage may
help keep your premium lower than if you park your car in an
uncovered driveway.
12.10 FIRST LOSS POLICY
A first-loss policy is a type of property insurance policy that provides only
partial insurance. In the event of a claim, the policyholder agrees to
accept an amount less than the full value of damaged, destroyed, or
stolen property. In return, the insurer agrees to not penalize the
policyholder for under-insuring their goods or property—for example, by
not raising rates on renewal
First-loss policies are most commonly used as theft or burglary
insurance to insure against events where a total loss is extremely rare
(i.e., the burglary of all goods contained in a large store). In a first-loss
policy claim event, the policyholder does not seek compensation for
losses below the first-loss level. Premiums are calculated
proportionately, meaning they are not based on the full value of total
goods or property.
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First-loss insurance is also considered first when filing any claims if
someone carries more than one policy for a given threat to their
property. The coverage provided can actually be more comprehensive,
which can be important for costly assets that might otherwise be difficult
or impossible to insure.
12.11 INCREASED VALUE INSURANCE
Traditionally, under the “Marine Insurance Act”, Marine Policy (Hull &
Machinery Insurance) covers the market value of the ship which refers to
the Shipowners’ “insurable interest”. Any cover in excess of market
value was prohibited. However, in the past century, shipowners has a
demand for additional costs associated with a Total Loss event to be
covered, for example, the sundries for the ship replacement. Therefore,
the Insurance Market started to recognize that the assured has an
additional insurable interest beyond the vessel’s market value and in
excess of the sum of insured under Hull & Machinery Insurance.
Increased Value Insurance was instituted as an additional cover,

commonly known as “disbursement”, which insures an additional of 20%
to 25% over the Insured Value of the vessel in case of her Total Loss.
Due to the likelihood of a total loss event is relative small by comparing
with other risk elements in Hull & Machinery Cover, a lower premium
level would normally be offered in Increased Value Insurance.
12.12 INSURANCE TIME OR INSTITUTE CARGO CLAUSES

Institute cargo clauses come embedded in a marine insurance policy
that covers cargo in transit. These clauses are there to specify what kind
of items covers in the cargo in case of any loss or damage to the
shipment. It is interesting to note; institute cargo clause can cover
anything from the cargo to the container that holds its value along with
the transport mode used to ship the items.
Mainly, there are three basic sets of institute cargo clauses; A, B, C.
Coverage is directly related to the policyholder‘s insurance premium. It
means, the higher the marine insurance premium the policyholder pays;
the more would be the coverage he/she gets.
Here are the three institute cargo clauses as detailed below:
• Institute Cargo Clause A: It is one of the widest marine
insurance coverages and therefore, the policyholder should be
ready to pay the high premium for this as the policyholder would
be getting the extensive cover.
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• Institute Cargo Clause B: Considered to be slightly a restrictive
cover and therefore, the premium is moderate. The policyholder
mainly asks for coverage for some more valuable items or only a
partial cargo.
• Institute Cargo Clause C: It is the most restrictive coverage,
and the policyholder should be ready to pay the low premium.
However, as the premium would be low, the policyholder‘s
coverage would also be less.
Each of the institute cargo clauses mentioned above restricts goods that
are in transit. The items shipped would be in transit only if they have left
from the original location and are still in transit to the destination.
12.13 SOLATIUM
Solatium fund to Compensate Accident Victims in Hit and Run
Cases
In Hit &Run‘ cases, accident victims are eligible for compensation
through a Special Fund constituted in terms of Section 163 of the Motor
Vehicles Act, 1988 called ‗Solatium Fund‘. The amount of
Compensation is Rs 25,000/- in the event of death and Rs 12,500/- for
grievous injuries. A portion of the Gross Written Premium is contributed
towards this Fund every year by both Public and Private Insurers.
However, in case the vehicle is without insurance, the
victims/dependents have the right to claim compensation from the
owner/driver under Motor Vehicles Act, 1988.
Hit and Run
The Motor Vehicles Act, 1988 is a piece of social legislation and its
provisions are designed to protect the rights of road accident victims
where the identity of motor vehicle causing the accident cannot be
established. The relevant legal provision is enshrined in Section 161 of
Motor Vehicles Act where a ―hit and run motor accident‖ is defined as
an accident arising out of the use of a motor vehicle or motor vehicles
the identity whereof cannot be ascertained in spite of reasonable efforts
for the purpose. This Scheme came into force from 1.10.1982.
This Section provides for payment of compensation (solatium) as
follows:
• In respect of the death of any person resulting from a hit and run
motor accident, fixed sum of compensation is Rs.25,000
• In respect of grievous hurt to any person resulting from a hit and
run motor accident, fixed sum of compensation is Rs.12,500
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Hit & Run Claims Procedure
The victim of the ―hit-and-run‖ vehicle or his legal representative shall
make an application to the Claim Enquiry Officer in each Taluka. After
due enquiries, the Claims Enquiry Officer will submit a report together
with certificate of post-mortem or injury certificate to the claims
settlement commissioner who will either the District Collector or the
Deputy Commissioner at the District level. He will process the claims
and sanction the payment within 15 days from the receipt of report from
Claim Enquiry Officer and communicate sanction order to the nominated
office of the Insurance Company. The compensation under Hit and Run
Accident cases is made from a Solatium Fund which is contributed by
General Insurance industry under an agreed formula. The administration
of claims is done by New India Assurance Co Ltd which has nominated
one Divisional Manager in each district at District Level Committee which
is headed by District Collector.
LET US SUM UP
General insurance plans are the ideal solution for covering your financial
risks. The different types of general insurance policies provide coverage
for all possible types of financial risks that you might face. So, choose
the policies that you require and invest in general insurance for financial
security. You have learnt about, all types of insurance under general
insurance, the process and terms in the insurance till insurance note,
certificate, loss, claims, salvage and Hit & Run Claims.
CHECK YOUR PROGRESS
1. Cover notes is usually given for ______
a) 15 days b) 16 days
c) 17 days d) 18 days
2. Which of the following is not a public sector insurance company
a) United India Insurance Company
b) New India Assurance Company Limited
c) SBI Life Insurance Company
d) General Insurance Corporation of India
3. The word “assurance” is used for _____
a) life insurance b) fire insurance
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c)marine insurance d) medical insurance
4. In 2020 the deposit insurance and credit guarantee corporation were
permitted to increase deposit insurance coverage to _____
a)1 lakh b)7 lakh
c)5 lakh d)3 lakh
5. Which insurance company is the first general insurance company in
India
a) the oriented insurance company
b) GIC Re
c) new India assurance
d) triton insurance corporation limited
GLOSSARY
A certificate of : It is issued by an insurance company or broker.

insurance The COI verifies the existence of an insurance
(COI) policy and summarizes the key aspects and
conditions of the policy.
Floater : It is a type of insurance policy that covers personal

insurance property that is easily movable and provides
additional coverage over what normal insurance
policies do not
Floater : It is a type of insurance policy that covers personal

insurance property that is easily movable and provides
additional coverage over what normal insurance
policies do not
A first-loss : It is a type of property insurance policy that

policy provides only partial insurance.
SUGGESTED READINGS
Limited
Limited
183
WEB RESOURCES
1. GUIDE to What is General Insurance? - Features & Benefits of
General Insurance in 2022 (Hindi) - YouTube
2. Understanding Basic/ General Insurance Terms and Concepts (
Ch. 1) PART 1 - Bing video
3. CA1 Chapter 8 General Insurance. (Actuarial Science) - Bing
video
1.a) 2.c) 3.a) 4.c) 5.d)
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BLOCK 4
INSURANCE REGULATORY AUTHORITIES

AND INSURANCE MARKET
UNIT 13 : INSURANCE MARKET
UNIT 14 : INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY (IRDA)
UNIT 15 : INSURANCE COUNCILS AND OMBUDSMAN
185
UNIT 13
INSURANCE MARKET
STRUCTURE
Overview
Learning Objectives
13.1 Insurance Market
13.2 Public Sector Pioneers in Life and General Insurance `
Activities
13.2.1 Life Insurance Corporation of India
13.2.2 General Insurance Corporation of India
13.2.3 The New India Assurance Company Limited

13.2.4 United India Insurance Company Limited
13.2.5 The Oriental Insurance Company Limited
13.2.6 National Insurance Company Limited
13.2.7 Agriculture Insurance Company of India Limited
13.3 Insurance Agents and Brokers
13.4 Role of Insurance Brokers
13.5 Responsibilities of an Insurance Agent
13.6 Surveyors
13.7 Medical Examiners

13.8 Third party administer
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
The unit talks about the concept of Indian insurance market, Investments
and recent developments, public sector pioneers in life and general
insurance activities, Role of insurance agents and brokers, medical
examiners, Third party administers, Regulators.
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LEARNING OBJECTIVES
• explain the development of Indian insurance market
• get insight on Public Sector Pioneers in Life and General
Insurance Activities
• list out the role of insurance agents and brokers
• point out the responsibilities of insurance agents
• discuss the role of surveyor and the third party administer
13.1 INDIAN INSURANCE MARKET
The insurance market in India holds great potential to act as a booster
for the Indian economy. With the rise of population and poverty in the
country, there is a looming risk of uncertain financial losses.
The insurance industry of India has 57 insurance companies - 24 are in
the life insurance business, while 34 are non-life insurers. Among the life
insurers, Life Insurance Corporation (LIC) is the sole public sector
company. There are six public sector insurers in the non-life insurance
segment. In addition to these, there is a sole national re-insurer, namely
General Insurance Corporation of India (GIC Re). Other stakeholders in
the Indian Insurance market include agents (individual and corporate),
brokers, surveyors and third-party administrators servicing health
insurance claims.
The insurance sector is a late bloomer when it comes to the adoption of
cutting-edge technologies. Until the digital revolution picked pace, the
Insurance sector was content with its legacy models. However, with the
rapid proliferation of the new-age technologies such as Artificial
Intelligence (AI) and the Internet of Things (IoT), the industrial landscape
is evolving, and the incumbents are making strategies to enable the
digital transformation of their firms. The adoption of any new insurance
technology should be a top-down exercise and C-suite must lead the
effort. From gauging penetration of the new age insurance tech solutions
vis-a-vis change in consumer behaviour, the CIO needs to run the show
and usher the era of digital transformation in the organization
• Indian Insurance in the Global Scenario
In life insurance business, India is ranked tenth in the world.
India's share in global life insurance market was 2.73 per cent
during 2019. Compared to the previous year, the life insurance
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premium in India increased by 9.63 per cent whereas global life
insurance premium increased by 1.18 per cent.
• Insurance Penetration and Density
Insurance penetration and density are two metrics, among
others, often used to assess the level of development of the
insurance sector in a country. While insurance penetration is
measured as the percentage of insurance premiums to GDP,
insurance density is calculated as the ratio of premiums to
population (per capita premium).
• Insurance Premium
During the fiscal 2019-20, the gross direct premium of Non-Life
insurers was 1,88,916 crores as against 1,69,448 crores, in the
previous financial year 2018-19 registering a growth of 11.49
percent. Motor and health segments primarily helped the industry
to report this growth.
13.2 PUBLIC SECTOR PIONEERS IN LIFE AND GENERAL LIFE

INSURANCE ACTIVITIES:
Public Sector Insurance Companies are as follows:
13.2.1 Life Insurance Corporation of India

LIC of India was incorporated on 1st September 1956 by amalgamating
243 Companies by the Act of Parliament called Insurance Act, 1956. LIC
is governed by the Insurance Act 1938, LIC Act 1956, LIC Regulations
1959 and Insurance Regulatory and Development Authority Act 1999.
As on 31st March 2016, LIC has 8 Zonal Offices, 113 Divisional Offices,
2048 Branch Offices, 73 Customer Zones, 1401 Satellite Offices and
1240 Mini Offices in India.
The Corporation has Branch Offices in Fiji, Mauritius and United
Kingdom. It also operates through Joint Venture (JV) Companies in
overseas Insurance Market, namely Life Insurance Corporation
(International) B.S.C.(c), registered in Manama (Bahrain); Kenindia
Assurance Company Ltd. registered in Nairobi; Life Insurance
Corporation (Nepal) Ltd. registered in Kathmandu; Life Insurance
Corporation (Lanka) Ltd. registered in Colombo and Saudi Indian
Company for Co-operative Insurance(SICCI) registered in Riyadh. LIC
has also formed a Joint Venture Company Life Insurance Corporation
(LIC) of Bangladesh Limited between Life Insurance Corporation of
India, Strategic Equity Management Ltd and Mutual Trust Bank Ltd on
14.12.2015. A Wholly owned subsidiary, Life Insurance Corporation
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(Singapore) Pte Ltd. has been established on 30.4.2012. Among the
above two joint ventures (JVs), Kenindia Assurance Co. Ltd., Nairobi,
Kenya and Saudi Indian Company for Co-operative Insurance (SICCI),
Riyadh, Kingdom of Saudi Arabia are composite companies transacting
life and non-life business; and two JVs, LIC (Nepal) Ltd. &SICCI are
listed on their respective Stock Exchanges.
13.2.2 General Insurance Corporation of India
The General insurance industry was nationalized in 1972 and 107
insurers were grouped and amalgamated into four Companies –
National Insurance Co. Ltd., The New India Assurance Co. Ltd., The
Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd. The GIC
was incorporated in the year 1972 and the other four companies became
its subsidiaries. In November 2000, GIC was notified as the Indian
Reinsurer, and its supervisory role over its subsidiaries was brought to
an end. From 21 March 2003, GIC's role as a holding company of its
subsidiaries also came to an end and the ownership of the subsidiaries
was transferred to the Government of India. The Corporation has its
head office in Mumbai and 3 liaison offices in India (Delhi, Kolkata and
Chennai), 3 branches in foreign countries (London, Dubai and Kuala
Lumpur) and 1 representative office in Moscow.
13.2.3 The New India Assurance Company Limited
The company was founded by Sir Dorabji Tata on July 23rd, 1919 and
nationalized in 1973 with merger of Indian companies. The Company
has 2329 offices, and the employee strength is 18783 as on 31.03.2016.
The company provides insurance services to the customers having over
170 products catering to almost all segments of general insurance
business. The authorized capital and paid-up equity capital of the
company is Rs.300 crore and Rs.200 crore respectively.
13.2.4 United India Insurance Company Limited
United India Insurance Company Limited was incorporated in 1938. With
the nationalization of General Insurance business in India, 12 Indian
Insurance Companies, 4 Cooperative Insurance Societies and Indian
operations of 5 Foreign Insurers, besides General Insurance operations
of southern region of Life Insurance Corporation of India were merged
with United India Insurance Company Limited. The Company has 2080
offices and employee strength of 16345 as on 31.03.2016.
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3.2.5 The Oriental Insurance Company Limited
The Oriental Insurance Company Ltd was incorporated in the year 1947.
In 2003 all shares of the company held by the General Insurance
Corporation of India were transferred to the Government of India. The
Company has 1924 offices in the country and has employee strength of
13923 as on 31.03.2016.
13.2.6 National Insurance Company Limited
The Company was incorporated in the year 1906. After nationalization it
was merged, along with 21 foreign and 11 Indian companies, to form
National Insurance Company Ltd. The Company has 1998 offices all
over India and employee strength of 15079 as on 31.03.2016.
13.2.7 Agriculture Insurance Company of India Limited
'Agriculture Insurance Company of India Limited’ (AIC) was incorporated
to exclusively cater to the insurance needs of the persons engaged in
agriculture and allied activities in India under the Companies Act, 1956
on 20th December 2002. General Insurance Corporation of India (GIC),
NABARD and four public sector general insurance companies have
contributed towards the share capital of the Company. The Authorized
Share Capital of the Company is Rs. 1500 crore with initial Paid-up
Equity Share Capital of the Company of Rs. 200 crores.
13.3 INSURANCE AGENTS AND BROKERS
In view of the fact that the insurance intermediary is at times, an agent
for an insurer and at other times, an agent for the insured, it becomes
necessary to understand what they do as their general lament is that
their role constitutes a fine balancing act, an invidious position Insurance
intermediaries are brokers or agents who represent consumers’
insurance transactions. They are contracted with multiple insurance
companies so they can focus on matching their client's needs with the
most suitable insurance products.
Insurance agents and brokers are professionals who sell insurance.
They may choose to specialize in a certain area, such as property and
casualty insurance (P&C), which protects businesses against lawsuits
and property losses.
1. Insurance Agent
An insurance agent represents one or more insurance companies and
sells their policies for a commission. They can either work full-time at
insurance sales for an agency, or as independent contractors.
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Their job is to represent the insurance company in the transaction while
also helping customers find the right coverage. The agent has an
agency agreement, or contract, with the insurer that stipulates the
different types of insurance the agent is able to sell and the commission
rates for each policy.
There are two types of insurance agents:
• Captive agents typically represent only one specific insurance
company.
• Independent insurance agents typically represent more than one
insurer.
Both captive and independent agents work on commission and can
execute an insurance transaction from start to finish, on a variety of
insurance plans.
2. Insurance Broker
An insurance broker represents consumers in their search for coverage
and can sell policies from several different insurance companies for a
commission. Unlike captive and independent agents, who represent one
or more insurance companies, a broker’s primary duty is to the client.
A retail broker examines a client’s needs and searches from several

providers to find their client the right policy at the right price. They make
their money through broker fees, which are a percentage commission on
the policies being sold.
Since brokers don’t represent insurance companies, they can’t bind
coverage on behalf of an insurer when purchasing insurance. They must
hand over the account to an insurer or insurance agent to complete the
transaction.
3. Difference Between Insurance Agents and Brokers
While an Agent represents only one insurance company ( one general,
one life or both if he is a composite agent, apart from a health insurance
company), a Broker may dealt with more than one life or general or both.
Insurance Agents - Insurance agents are insurance professionals that

serve as an intermediary between the insurance company and the
insured. As a broad statement of law, an insurance agent’s liability to
their customers is purely administrative in nature. That is, agents are
only responsible for the timely and accurate processing of forms,
premiums and paperwork. Agents have no duty to conduct a thorough
examination of an individual’s business or to make sure that appropriate
health insurance coverage has been provided to the concerned
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individual. Rather, it is the customer’s obligation to make sure that
he/she has purchased the required/desired insurance coverage.
Insurance Brokers - Insurance brokers can be best described as a kind
of super-independent agent. Brokers can offer a whole host of insurance
products and services for an individual or a prospective policyholder to
consider. Brokers are required to have a broker’s license issued by
IRDA (Insurance Regulatory and Development Authority) which typically
means that the broker will have additional technical and professional
expertise as compared to an insurance agent.
Insurance brokers also have a higher duty towards their clients. These
brokers have the duty to analyze a business, interpret the data from
various databases and secure correct and adequate coverage for the
insurance business. This is a higher duty than the pure administrative
duty of the insurance agent. However, this expertise comes at a price.
Insurance brokers typically charge an administrative fee or premium
payments which are higher than that charged by an Insurance Agent.
Company Representation
Insurance agents typically represent only one insurance company. They
are often referred to as "captive" agents. Insurance brokers represent
multiple insurance companies. Therefore, brokers are free to offer a
wider range of products to their clients.
13.4 ROLE OF INSURANCE BROKERS
The functions of a direct broker shall include any one or more of the
following:
i. Obtaining detailed information of the client's business and risk
management philosophy.
ii. Familiarising himself with the client's business and underwriting
information so that this can be explained to an insurer and others.
iii. Rendering advice on appropriate insurance cover and terms.
iv. Maintaining detailed knowledge of available insurance markets, as
may be applicable.
v. Submitting quotation received from insurer/s for consideration of a
client.
vi. Providing requisite underwriting information as required by an
insurer in assessing the risk to decide pricing terms and conditions
for cover.
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vii. Acting promptly on instructions from a client and providing him
written acknowledgements and progress reports;
viii. Assisting clients in paying premium under section 64VB of
Insurance Act, 1938 (4 of 1938);
ix. Providing services related to insurance consultancy and risk
management.
x. Assisting in the negotiation of the claims; and
xi. Maintaining proper records of claims.
13.5 RESPONSIBILITIES OF AN INSURANCE AGENT
In an insurance industry, the insurance agent possesses multi-faceted

roles to play as enlisted below:
• The insurance agent helps in promoting and selling of insurance
products and services to its customers.
• Giving sound financial advisory services and customer support to
the clients
• Needs to deal with not only individuals but their families and
corporate businesses too.
• Needs to have good relationship including good rapport with
his/her existing and prospective clients
• General awareness about the markets
• Promotion of insurance brands needs to have a carefully drawn
roadmap.
• Well-planned strategies and plans need to be chalked out.
• Public-relation (PR) building exercise should be given significant
importance
• Business Development tactics needs to be pursued aggressively.
13.6 SURVEYOR
Surveyors- Link between Insurer and Insured an Insurance Policy is a
combination of protection and savings to meet your future needs. In
today’s life the worthiness of insurance cannot denied by anyone.
Whenever a person takes an insurance policy, the motive behind this is
to secure the future from certain risk on the happening of certain event.
We can feel the importance of insurance in our day to day life also. In
modern and busy life people want to save their each and everything
through the insurance.
As per requirements of an individual, insurance companies provide
insurance policy for buildings, machinery and accessories, stock and
stock in process for business purpose, furniture for the purpose of
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business and profession, mobile, transport, home, health etc. against
loss an damages arising out of fire and allied perils. Machinery
Breakdown policy covers financial loss incurred by the insured due to
loss or damage to machinery as a result of accidental electrical and
mechanical breakdown. It reimburses the insured for the cost of repairs
or replacement of machinery of like nature.
Fire loss of profit insurance covers major fire loss, due to which the
business operations get interrupted resulting in reduced turnover and
eventually in loss of profits. Plate glass insurance covers against the
actual breakage of plain glass of ordinary glazing quality completely and
securely fixed. Any equipment operated with electrical power may suffer
breakdown spontaneously. Electronic equipment insurance policy covers
"All Risks" to cover Computers, Bio medical equipment, X-ray
equipment, audio/video equipment etc. Disaster insurance policy
provides protection against disasters arising out of earthquake, cyclone,
landslide, floods, explosion, fire and so on. Machinery Insurance
provides protection against unforeseen and sudden physical damage to
the insured machinery. Mobile Cellular Phones and Pager can be
covered against the risk of fire, theft Terrorist activity, Riot and Strike.
Insurance is a service that works based on the principle of indemnity.
This means in any General Insurance claim, such as car insurance claim
the customer should be put back to the monetary position that he was at
immediately before the occurrence of the loss. The principle means that
with the insurance payoff, the insured should neither make a profit nor
suffer a loss. In order to achieve that it is important that a third party
called the surveyor, independent from the influence of the insurer and
insured, assesses the loss and liability. It should be noted that a licensed
surveyor is mandatory to be appointed only in case of estimated loss,
exceeding INR 50,000 in motor insurance case, and exceeding INR
1,00,000 in non-motor insurance case. The car insurance claim
surveyor, who acts as a link between the insurer and the insured, and
fulfills the following role and responsibilities:
Role and Responsibilities of Surveyor in Insurance claim
• Investigate and Assess: The car insurance surveyor
investigates to assess and verify the damages and tries to
quantify the loss that has occurred. The losses may have also
been sustained by a third party, apart from the insured. At the
completion the surveyor submits the report to the insurer.
• Conflict of interest: If the surveyor is in any way related to the
incidence or the insured, they must declare it to the insurer prior
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to the assessment. Any personal relationship may hamper the
neutrality of the surveyor and his report being rejected on the
grounds of conflict of interest.
• Neutrality and Confidentiality: The surveyor must remain
neutral in all cases and ensure to secure interest of both the
parties and should not endanger the responsibility of the
insurance company and interest of the insured. The surveyor
also must not reveal any personal details of the insurer to anyone
outside of the car insurance claim process.
• Thoroughness: The surveyor must do a thorough job and
personally conduct the spot survey. After careful consideration of
the causes of the incidence and the circumstances at which the
incidence occurred, the surveyor can comment upon the
insurance category. The surveyor should not miss out on any
details pertaining to the incidence or the claim in the report that
he or she submits.
• Provide immediate financial relief to the insured: Surveyor
may recommend on Account payment up to 75%, wherever
admission of liability is clearly established, to provide immediate
financial relief to the insured.
• Damage prevention advice: The surveyor should share any
applicable advice that may result in further loss prevention and
share safety or security procedures.
• Point out discrepancy: The surveyor must point out
discrepancy or ambiguities in the verbiage of the policy that he or
she comes across.
• Suggest the Depreciation: The surveyor shall make
recommendations based on any depreciation that may have
happened in the car due to age and usage. The surveyor needs
to determine the appropriate depreciation percentage and
suggest the same in the report. They can also comment on the
disposal or salvage as applicable.
• Maintain timelines: The surveyor needs to be appointed within
72 hours from the initiation of the claim according to the IRDA
regulation of 2017. He must submit their report to the insurer and
a copy to the insured, within 30 days of appointment. This can be
extended by the Surveyor to a maximum of 6 months provided
the insured has been informed about the same.
Even though the surveyor is appointed by the insurance company; they
shall not favor insurance companies or insured. The surveyor needs
your cooperation and you as the insured need to extend your
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cooperation to surveyor. You should also preserve the incidence or
accident scene to the best of your abilities, since disturbing it
intentionally may be one of the reasons for car claim rejections. A video
recorded by the insured and providing the garage receipt proofs are
honoured by many insurance companies these days. In some complex
cases a second surveyor may be appointed by the insurer, only with a
valid reason for not accepting the report of the first surveyor.
13.7 MEDICAL EXAMINERS
A medical claims examiner works in the insurance field to ensure that
medical services providers submit insurance claims correctly and in a
timely manner.
A medical claims examiner works in the insurance field to ensure that
timely manner.
In other words, a career as a medical claims examiner means
investigating insurance claims, confirming that the billed costs are
accurate, and that the treatments and procedures that a patient receives
are commensurate with their diagnosis. Though medical claims
examiners aren’t trained medical practitioners, they must possess an
intimate knowledge of medical procedures in order tofulfill the duties of
their job
The central role of a medical claims examiner is to protect insurance
companies from financial losses. To provide their employers with that
protection, medical claims examiners investigate insurance claims to
ensure that the amounts billed to insurance for things like surgery,
medical tests, rehabilitative services, and so forth, are both accurate and
appropriate for the type of services rendered.
For example, if a person has surgery on their knee, a medical claims
examiner would evaluate every claim to insurance for that surgery. This
would include claims for emergency services like an emergency room
visit, evaluative procedures like X-rays or an MRI, surgical procedures,
support services during surgery like anesthesia, as well as post-surgery
recovery services like physical therapy.
But medical claims examiners don’t just take a look at the claims
submitted on behalf of patients. Instead, they also review the work of
other insurance claims workers to determine accuracy. For example, if
an insurance claims adjuster submits a claim on behalf of a client for a
prescription, a medical claims examiner might review the adjuster’s
paperwork to look for any errors or inaccuracies. This includes double-
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checking claims to ensure that they are submitted in a manner that
follows the insurance company’s guidelines.
A medical claims examiner, one must first learn certain knowledge and
skills that will help them execute the duties of the job. Common learning
targets include, but are not limited to, the following:
• Medical terminology – During their training, medical claims
examiners are schooled in various medical terms, including
common medical terminology that must be understood in order to
evaluate medical claims.
• Research protocols – When studying to become a medical
claims examiner, students develop skills necessary to conduct
research, including building analytical and problem solving skills.
• Data entry – Much of a medical claims examiner’s job is
investigating claims and conducting research. As such, they must
be able to record data accurately and efficiently, often into an
insurance company’s proprietary software.
• 10-key computer skills – Workers in this field have to enter a lot
of numerical data, which necessitates being proficient in 10-key
computer data entry.
• Data analysis – Not only do medical claims examiners need to
be able to collect data, but they must also possess the ability to
analyze data, interpret data, and make educated assumptions
about what the data is telling them.
• Privacy laws – Various state and federal laws ensure a patient’s
privacy. Students in a medical claims examiner training program
must be intimately familiar with such laws.
• Insurance procedures – Medical claims examiner students
learn different procedures for insurance claims, including how to
review them, reasons for denying a claim, and how to process
approved claims.
• Customer service – Though medical claims examiners don’t
often have direct contact with patients, training programs
nevertheless offer instruction in how to interact with customers
and colleagues in a positive manner.
• Medical billing procedures – Future medical claims examiners
learn about the medical billing process, including the typical cost
of procedures, terminology used in medical billing, and electronic
medical billing practices.
To be a medical claims examiner, one must possess particular
skills and qualities in order to be successful. These include:
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• Knowledge of insurance standards guidelines – Medical
claims examiners should be familiar with insurance standards
that guide claims work, such as the types of treatments that are
commonly used for particular illnesses.
• Understanding of insurance practices – Claims examiners are
required to have a deep understanding of insurance practices,
including company policies and procedures that govern payouts
and claims denials.
• Written communication skills – This career requires workers to
be able to communicate effectively in written form, including
writing detailed reports that are accurate.
• Basic medical knowledge – Claims examiners must be able to
understand basic medical terms and understand common
medical procedures.
• Understanding of human behavior – It’s helpful for claims
examiners to understand how and why people behave the way
that they do as it often assists them in understanding the factors
involved in each claim they process.
• Computer skills – Medical claims examiners must manage a lot
of electronic data as well as record data that they collect. As a
result, being technologically savvy is a must.
• Analytical skills – Workers in this field must be able to think
critically and analyze information quickly and easily to determine
the accuracy and worthiness of claims.
• Detail-oriented – It can be easy to get lost in the details in this
profession. With so much information to sift through, being
precise and detail-oriented is a definite plus.
• Integrity – Claims examiners are tasked with determining if and
when a claim is approved. Since lives might hang in the balance,
being a person of great integrity is necessary.
13.8 THIRD PARTY ADMINISTERS
TPA is the abbreviation for Third-party Administrator. As the name
suggests, it is someone or some organization that is a third party and an
administrator. This brings up the question: what is a third-party
administrator? The simple answer is; someone who is not the first or the
second party in a health insurance contract (not directly involved) and
assists in the administrative aspect of the services mentioned in the
contract.
For example, Health TPA is someone engaged in administering
services related to health insurance.
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In India, over the past few years, the number of health insurance buyers
has increased significantly. Today, if you want to buy a policy, there are
options galore. But, when filing a claim, you must deal with the TPA
(Third Party Administrator) appointed by the insurer. As per the IRDA
rules, a policyholder must inform the TPA as soon as they get
hospitalised and provide details of the treatment availed.
A Third-Party Administrator is an organisation that acts as a link
between the insurer and the policyholder. It is responsible for handling
the claim request on behalf of the insurance company. In general, these
administrators work independently or in the insurer's interest and are
licensed by the insurance regulatory body, the IRDA (Insurance
Regulatory and Development Authority).
Third Party Administers in Health Insurance

The scope of health insurance is a lot wider than other general
insurance categories like vehicle or travel insurance. Due to this wide
scope, health insurance involves a plethora of terminologies. This is the
reason why probably potential and current policyholders perceive health
insurance to be filled with complexities. TPA is a link between the insurer
and the insured in the case of a hospitalization claim.
• TPA is chosen by the health insurance company.
• TPA’s facilitate the claim settlement process by administrating
tasks such as dealing with documents and settling hospital bills.
• TPAs are licensed by the Insurance Regulatory and
Development Authority of India (IRDAI).
• One TPA can be associated with several insurers.
Functions of TPA
• TPA is the link between the insurer and the policyholder in case a
claim is made.
• TPA is chosen by a health insurance firm.
• TPA makes the claim process easy by dealing with the
documents and settling the hospital bills. TPA's are licensed by
the Insurance Regulatory and Development Authority of India.
• TPA can be in link to various policyholders.
• These are associated with the smooth settlement process.
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Role of TPA in Health Insurance
• Record Keeping
All the records which are crucial to the policyholder are
maintained by the TPA. These records are stored in a dedicated
database.
• Continuous Support
Several TPAs have 24x7 support. It is important to keep in mind
that they are there to make the settlement process easy for the
policyholder and are often present in case of any queries. This
support is offered by call and even application.
• Connecting Link
In case of any hospitalization claim, the policyholder directly or
indirectly deals with the TPA. The TPA is the one that offers a
unique identification number to the patient which alters helps in
the claim settlement.
• Hospitals
TPA also checks whether the hospitals meet the criteria which
are part of the network hospital chain and might offer extra
services related to ambulance, extra beds, medicine supply's, etc
to the policyholder.
The role clearly defines the benefit of the TPA which in one
sentence is very simple. It helps in the settlement process to the
insurer. It gives a 24x7 support and handles all the technical stuff
from handling document to providing ID numbers.
There is also a possibility of chances of cancellation of TPA if
you need it or you can also change one by reaching out to your
insurance company. You must have to explain the reason for the
cancellation of TPA and it will only cancel after the approval.
Benefits of Third-Party Administrators in Health Insurance for

Policyholders:
The benefit of TPAs for the insurance company is obvious—they get
assistance for settling claims. But how does a good health insurance
TPA benefit the policyholders? The following points will let you know.
• Hand-holding during hospitalization.
• Providing ID cards to policyholders/patients.
• Assistance regarding the right kind of documentation.
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• Efficient Cashless Claims settlement process.
• 24×7 customer support.
• Simplification of the entire claim settlement process.
LET US SUM UP
The scope of health insurance is a lot wider than other general
insurance categories like vehicle or travel insurance. Due to this wide
scope, health insurance involves a plethora of terminologies.
CHECK YOUR PROGRESS
1. _________ have unique circumstances that make their analysis
different from other financial institutions such as banks or lenders.
a) insurance companies b) investing companies
c) hiring companies d) Venture company
2. ________ Examiner works in the insurance field to ensure that
timely manner.
a) Medical claims b) Consumer behaviour
c) Consumer shopping d) Medical bills
3. National Insurance Company is one of the oldest general
insurance companies in India, having been formed in erstwhile
Calcutta on________.
a) December 1907 b) December 1906
c) December 1908 d) December 1909
4. ____________ was formed as a part of the Tata business empire
on July 23, 1919
a) New India Assurance Company
b) National India Assurance Company
c) Asian Assurance Company
d) Nepal Assurance Company
5. ___________the Companies Act, 1956 on 20th December 2002.
a) Agriculture Insurance Company Limited
b) National Assurance Limited
c) Asian Insurance Limited
d) Kotak Mahindra Limited.
201
GLOSSARY
TPA : Third-party Administrator
Competitive : It relies on marketplace forces to keep

rating insurance rates consistent with underlying
costs
Insurance : It is measured as the percentage of insurance

penetration premiums to GDP, insurance density is
calculated as the ratio of premiums to
population (per capita premium).
Insurance agents : Its helps in promoting and selling of insurance

products and services to its customers
SUGGESTED READINGS
1) Dr. Avtar Singh: Law of Insurance, Universal Publication Pvt.

Limited
2) George E. Rejda: Principles of Risk Management and Insurance
3) M. N. Srinivasan: Principles of Insurance Law, Wadhwa & Co.
4) Rajiv Jain: Insurance Law and Practice, Vidhi Publication Private
Limited
WEB RESOURCES
1. Insurance: Definition, How It Works, and Main Types of Policies
(investopedia.com)
2. meaning of Insurance and Insurance marketing services - Bing
video
3. Analysis of insurance companies - Bing video
1. a ) 2. a) 3. b) 4.a) 5.a)
202
UNIT 14
INSURANCE REGULATORY
AND DEVELOPMENT AUTHORITY (IRDA)
STRUCTURE
Overview
Learning Objectives
14.1 Regulators in Insurance
14.2 History of IRDA
14.3 Salient features of IRDA
14.4 Salient Features of IRDA Guidelines for Insurance Plans
14.5 Duties, Role and Functions of IRDA
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Let’s have an overview of the IRDA Act. The IRDA (Insurance
Regulatory and Development Authority) is the national regulatory body
for Insurance industry (both Life and Non-Life Insurance Companies)
under the auspices of Government of India, situated at Hyderabad. IRDA
was established by an Act enacted in Indian Parliament known as IRDA
Act 1999 and was amended in 2002 to incorporate some emerging
requirements as well as to overcome some deficiencies in the entire
process.
LEARNING OBJECTIVES
• explain about the insurance regulators in India
• describe the history of IRDA
• discuss the salient features of IRDA
• list out the IRDA Guidelines for Insurance Plans
• point out the duties, Role of IRDA and Functions of IRDA
203
14.1 REGULATORS IN INSURANCE
Insurance is regulated by the state. Guidelines states use to regulate
rates:
1. Rates must be adequate – a company must remain solvent and
be able to pay out in the event of large or numerous claims.
2. Rates must not be excessive – there must be enough on hand to
pay out, but not so much that companies earn exorbitant profits.
3. Rates must not be unfairly discriminatory – they must reflect
differences in expected claims and expenses.
State regulators' primary responsibilities are to preserve the long-term

solvency of insurance companies and protect insurance consumers from
unfair and discriminatory treatment. The basic regulatory systems are:
Competitive Rating (file-and-use): Competitive rating relies on
marketplace forces to keep insurance rates consistent with underlying
costs. The competitive rating law does not mean the regulator gives up
oversight of insurance companies. Regulators maintain power to reject
any rates they deem to be inadequate, excessive or unfairly
discriminatory, and may require insurers to refund excessive rates to
policyholders and pay fines if rates are not deemed appropriate.
Prior Approval: In prior approval states, rates must be filed with
regulators who must then individually approve or disapprove the filing
before it can go into effect. The system essentially relies on the
regulators' judgment and the existing political environment.
14.2 HISTORY OF IRDA
You must have observed that every country has its own insurance laws.
In India also, Government started exercising control on Insurance
business by passing two Acts in the year 1912 namely:
• Provident Insurance Societies Act V of 1912 and
• Indian Life Insurance Companies Act VI of 1912.
These acts were later comprehensively amended and a new Act namely
Insurance Act 1938 came into existence for controlling:
• Investment of funds,
• Expenditure, and
• Management of the insurance companies.
The Office of Controller was established to implement this Act.
Again, this Act was amended in 1950 as per the need of the hour. But in
view of growing malpractices in Life Insurance business and also due to
204
the illiteracy level being high and lack of will for spread of Life Insurance
business, it was nationalized by Government of India.
LIC Act was passed in June 1956, and this Act came into force from 1st
Sept.1956. Similarly general insurance business was nationalized Act
came into force w.e.f. 1st April 1973 through General Insurance
Business Nationalization Act 1972 (GIBN Act 1972). To implement these
acts the Government made some minor changes in the Insurance Act
1938.
In early 90’s, with the world market forces playing with full strength;
growing literacy level; better regulatory systems and need for fast growth
in this sector, the need of the hour was to go with the world and throw
open Life and General Insurance Sector to private entrepreneurs once
again so that there is no monopoly and the customer/consumer/buyer
gets more choices than one type of Insurance product.
To study the liberalization process in Insurance sector in India, Malhotra
Committee was formed under the Chairmanship of Late Shri R.N.
Malhotra. The Malhotra committee submitted its report in 1994 which
recommended that private companies be allowed to operate in India.
The Government accepted the Committee’s recommendation and
Insurance Regulatory Authority (IRA) was set up in 1996 to show the
path for privatization of insurance Industry. The main aim was the
development of Insurance covering all strata of society (to not only rich
but poor, folks from rural, tribal, unorganized sector, social sector,
disabled community, daily wagers, women at large, etc.) gained
importance through concerns put forth by political leaders, trade
unionists, social organizations, cooperatives and policy makers; which
amended the name IRA to IRDA (Insurance Regulatory & Development
Authority). Again, some amendments were made in the Insurance Act
1938 for smooth functioning of IRDA.
Full force and maximum utility of various institutions like Advisory
Committee and self- regulatory organizations are not yet realized in India
as the regulator seems to be in a long- learning mode. Due to over
delegations, it is the individual incumbents that decide the pace and
extent of utilization of prudential and statutory bodies.
Research on insurance sector is limited to opinion being sought through
legacy channels. The Indian market mulls and patiently awaits the
revision of Insurance Act along with establishment meaningfully
functioning regulatory bodies that are devoid of excess delegation and
subjective localization of development agencies
205
14.3 SALIENT FEATURES OF IRDA ACT
By now, you must be eager to know the salient features of IRDA Act.
Well, lets’ discuss them. The Insurance Regulatory Development
Authority Act, 1999 marked the end of government monopoly in the
insurance business. The IRDA Act received the assent of the President
of India on 29 December 1999. The IRDA Act has ramifications on the
Insurance Act (1938), the Life Insurance Corporation Act (1956) and the
General Insurance Business (Nationalisation) Act (1972).
The following are salient features of the IRDA Act (1999):
1. The insurance sector in India has been thrown open to the
private sector. The second and third schedules of the Act provide
for removal of existing corporations (or companies) to carry out
the business of life and general (non-life) insurance in India.
2. An Indian insurance company is a company registered under the
Companies Act, 1956, in which foreign equity does not exceed
26 per cent of the total equity shareholding, including the equity
shareholding of NRIs, FIIs and OCBs.
3. After commencement of an insurance company, the Indian
promoters can hold more than 26 per cent of the total equity
holding for a period of ten years, the balance shares being held
by non-promoter Indian shareholders which will not include the
equity of the foreign promoters, and the shareholding of NRIs,
FIIs and OCBs.
4. After the permissible period of ten years, excess equity above
the prescribed level of 26 per cent will be disinvested as per a
phased programme to be indicated by IRDA. The Central
Government is empowered to extend the period of ten years in
individual cases and also to provide for higher ceiling on
shareholding of Indian promoters in excess of which
disinvestment will be required.
5. On foreign promoters, the maximum of 26 per cent will always be
operational. They will thus be unable to hold any equity beyond
this ceiling at any stage.
6. The Act gives statutory status for the Interim Insurance
Regulatory Authority (IRA) set up by the Central Government
through a Resolution passed in January 1996.
7. All the powers presently exercised under the Insurance Act,
1938, by the Controller of Insurance (CoI) will be transferred to
the IRDA.
206
8. The IRDA Act also provides for the appointment of CoI by the
Central Government when the Regulatory Authority is
superseded.
9. The minimum amount of paid-up equity capital is ` 100 crore in
case of life insurance as well as general insurance, and ` 200
crore in the case of re-insurance.
10. Solvency margin (excess of assets over liabilities) is fixed at not
less than ` 50 crore for life as well as general insurance; for
reinsurance solvency margin is stipulated at not less than ` 100
crore in each case.
11. Insurance companies will deposit ` 10 crore as security deposit
before starting their business.
12. In the non-life sector, IRDA would give preference to companies
providing health insurance.
13. Safeguards for policy holders’ funds include specific provision
prohibiting investment of policy holders’ funds outside India and
provision for investment of funds in accordance with policy
directions of IRDA, including social and infrastructure
investments.
14. Every insurer shall provide life insurance or general insurance
policies (including insurance for crops) to the persons residing in
the rural sector, workers in the unorganized or informal sector or
for economically vulnerable or backward classes of the society
and other categories of persons as may be specified by
regulations made by IRDA.
15. Failure to fulfill the social obligations would attract a fine of ` .25
lakh; in case the obligations are still not fulfilled, license would be
cancelled.
14.4 SALIENT FEATURES OF IRDA GUIDELINES FOR INSURANCE
PLANS
We need to know that the new guidelines issued by IRDA aim to make
insurance policies more customer friendly.
The Insurance Regulatory and Development Authority (IRDA) has
notified changes made to the guidelines on design of life insurance
products in the gazette in February 2013. All existing group products will
stand withdrawn from 1 July 2013 and all individual products from 1
October 2013.
These guidelines, effective from October 2013, aim to make insurance
policies friendlier. Listed below are some salient features of these
guidelines.
207
The new guidelines have introduced three broad categories of
products—Traditional insurance plans, variable insurance plans (VIPs)
and unit-linked insurance plans (ULIPs).
1. Traditional Plans: According to the guidelines, the product design of
traditional plans would remain almost the same. These plans would
continue to come in two variants: Participating and non-participating
plans.
For participating policies the bonus is linked to the performance of the
fund and is not declared or guaranteed before. But, the bonus once
announced becomes a guarantee. It is usually paid in case of death of
the policyholder or maturity benefit. This bonus is also called
reversionary bonus.
In case of non-participating policies, the return on the policy is disclosed
in the beginning of the policy itself. In both cases, a policyholder should
calculate the net return to assess the total costs.
New traditional products will have a higher death cover. For regular
premium policies, the cover will be 10 times the annualised premium
paid for those below 45 and seven times for others. The minimum death
benefit in case of traditional plan is at least the amount of sum assured
and the additional benefits (if any).
2. ULIPs: In case of ULIPs, life insurers will now have to inform
policyholders of the reduction in yield of their ULIPs on a monthly basis.
Reduction in yield—difference between gross and net yields (expressed
in %)—refers to the lowering of investment growth within a fund due to
various charges.
The net yield can be arrived at after deducting all prescribed charges
from the gross yield. Insurers will also issue annual certificates
mentioning the premiums paid, charges and taxes deducted from the
fund value, and the final payments made.
3. Variable Insurance Plans: The guidelines have mentioned that VIPs
will guarantee a certain minimum rate of return at the beginning of
buying a policy—though they are linked to an index. As VIPs will be
treated at par with ULIPs, those products will follow the same
commission package for ULIPs. Under linked products, agents are
entitled to commission of up to only 10%. The charge structure and
discontinuance norms of VIPs will be in line with ULIPs.
This basic minimum rate of return is also called floor rate. Additional
benefits depend on the type of the policy. In the case of a non-
208
participating VIP, the additional benefit will be mentioned at the time of
buying the policy and may accumulate in the policy at specified intervals.
4. Reduced Commissions
The IRDA guidelines have reduced commissions on short-term policies
and have linked the quantity of commissions to the premium paying
periods for all products.
Agents of single premium non-pension products will receive
remuneration of up to 2% of the premium paid. In case of regular
premium insurance policies, a policy with a premium paying term of five
years will pay up to 15% in the first year, 7.5% in the second and third
year and 5% subsequently. As the premium paying term increases to 12
years and above, the commissions payable in the first year increases up
to 35% in case the company is at least 10 years old and 40% in case the
company is less than 10 years old. The regulator has framed the entire
format on the basis of tenure of the policies
In case of direct sale of products, such as the online mode, there will be
no commissions and this benefit will be passed on to the policyholder.
5. Death Benefit and Surrender Value
The minimum death benefit in case of VIPs and ULIPs is the policy
account value or higher of the two. The minimum guaranteed surrender
value for traditional plans has been increased. For traditional plans, with
a premium paying term of 10 years or more, there will be a guaranteed
surrender value after three years. For premium paying terms of less than
10 years, the guaranteed surrender value will accrue after the second
year. This guarantee surrender value will be 30% of total premiums paid.
Currently, the guaranteed surrender value is usually 30% of all the
premiums paid minus the first-year premium and is paid only if premiums
have been paid for three years.
6. Health Insurance
The IRDA in February 2013 has also issued guidelines to standardize
health insurance in India. Now, all health insurance policies would be
renewable for lifetime and will have an entry age of at least 65 years. All
policies except customised ones will be renewable for life time. Insurers
have to settle claims within 30 days after the receipt of all the
documents.
In case of a claim, no-claim bonus can be reduced proportionately,
however it won’t be zero. In a health insurance policy, when a renewal is
made without any claims in the preceding period of the policy, the
209
insurer offers a bonus to the policyholder. This bonus is usually in the
form of a discount in the premium around 5% for every claim-free year.
The bonus can go up to 50%, provided no claim is made for 10
consecutive years. Any discount or loading in the renewal premium will
be mentioned to the policyholder at the time of policy renewal.
14.5 DUTIES, ROLE, AND FUNCTIONS OF IRDA
14.5.1. Duties, Powers and Functions of Authority
(1) Subject to the provisions of this Act and any other law for the time
being in force, the Authority shall have the duty to regulate, promote and
ensure orderly growth of the insurance business and re-insurance
business.
(2) Without prejudice to the generality of the provisions contained in sub-
section (1), the powers and functions of the Authority shall include, -
a. Issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration.
b. Protection of the interests of the policy holders in matters
concerning assigning of policy, nomination by policy holders,
insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance.
c. Specifying requisite qualifications, code of conduct and practical
training for intermediary or insurance intermediaries and agents;
d. Specifying the code of conduct for surveyors and loss assessors;
e. Promoting efficiency in the conduct of insurance business;
f. Promoting and regulating professional organizations connected
with the insurance and re-insurance business;
g. Levying fees and other charges for carrying out the purposes of
this Act;
h. Calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organizations
connected with the insurance business;
i. Control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers in respect of general
insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938
(4 of 1938);
j. Specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by
insurers and other insurance intermediaries;
k. Regulating investment of funds by insurance companies;
210
l. Regulating maintenance of margin of solvency;
m. Adjudication of disputes between insurers and intermediaries or
insurance intermediaries;
n. Supervising the functioning of the Tariff Advisory Committee;
o. Specifying the percentage of premium income of the insurer to
finance schemes for promoting and regulating professional
organizations referred to in clause (f);
p. the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social
sector; and
q. Exercising such other powers as may be prescribed.
LET US SUM UP
The IRDA in February 2013 has also issued guidelines to standardize
health insurance in India. Now, all health insurance policies would be
renewable for lifetime and will have an entry age of at least 65 years. All
policies except customized ones will be renewable for lifetime. Insurers
have to settle claims within 30 days after the receipt of all the
documents.
CHECK YOUR PROGRESS

1. The Authority shall be a body corporate by the name
aforesaid having ………………………… succession and a common
seal.
a) Perpetual b) success
c) memorandum d) articles
2.The head office of the Authority shall be at such place as the
………………………. government may decide from time to time.
a) State b) District
c) Central d) Local
3.The Chairperson and every other whole-time member shall hold office
for a term of…………………… years from the date on which he enters
upon his office and shall be eligible for reappointment.
a) Five b) Seven
c) Three. d) Four
4. All the assets and liabilities of the----------------Insurance Regulatory
Authority shall stand transferred to, and vested in, the Authority.
211
a) Middle b) High
c) Interim d) Authority
5. The accounts of the Authority shall be audited by the and
………………………………… of India.
a) Comptroller b) Comptroller, Auditor-General
c) Promoter d) Auditor
GLOSSARY
Regulations :Regulations mean the regulations made by the
Authority.
Ombudsman : an official appointed to investigate individuals’
complaints against a company
Policy holder : Person or group in whose name an insurance
policy is held.
Claims : formally request or demand; say that one owns or
has earned
Grievance : real or imagined cause for complaint, especially
unfair treatment
SUGGESTED READINGS
Limited
Limited
WEB RESOURCES
1. IRDAI | Insurance Regulatory and Development Authority of India
| all about IRDAI - Bing video
2. IRDAI Chairman Debasish Panda Exclusive On Regulating &
Developing Insurance Industry | CNBC-TV18 | Watch (msn.com)
3. Insurance Information Bureau of India Regulations 2021: IIB's
rates to ensure profitability of insurers! | Zee Business
(zeebiz.com)
ANSWER TO CHECK IN PROGRESS
1.a) 2.c) 3.c) 4.c) 5.c)
212
UNIT 15
INSURANCE COUNCILS AND
OMBUDSMAN
STRUCTURE
Overview
Learning Objectives
15.1 Insurance councils

15.2 Insurance Ombudsman
15.2.1 Insurance Ombudsman Scheme
15.2.2 Features of Insurance Ombudsman
15.3 Educational Institutes
15.4 Tariff Advisory Committee
15.5 Insurance Pricing- Determinants

15.6 Insurance Pricing Methods
15.6.1 Schedule Rating Method
15.6.2 Retrospective Rating Method

15.6.3 Experience Rating Method
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
This unit explains about the insurance councils and ombudsman. And it
also explains the tariff advisory committee and the meaning of insurance
pricing and its methods.
LEARNING OBJECTIVES
• gain knowledge on meaning and concepts of insurance councils
• describe the functions of insurance ombudsman.
213
• discuss the different insurance ombudsman scheme
• explain the tariff advisory committee
• describe the concept of insurance pricing and its methods
15.1 INSURANCE COUNCILS
Section 64 C of Part II-A of the Indian Insurance Act 1938 states that
there shall be two Councils of the Insurance Association of India, namely
a. The Life Insurance Council consisting of all the members and
associate members of the Association, who carry on life
insurance business in India, and,
b. The General Insurance Council consisting of all the members
and associate members of the Association who carry on general
insurance business in India.
i) Life Insurance Councils
Life Insurance Council is a forum that connects the various stakeholders
of the sector. It develops and coordinates all discussions between the
Government, Regulatory Board and the Public. In short, it is the face of
the Life Insurance industry.
Constituted under Sec.64C of Insurance Act 1938, the Life Insurance
Council functions through several sub-committees and includes all life
insurance companies in India. In total, there are 24 life insurers who
offer a variety of traditional and new innovative products.
Some of LI Council functions are
• Creating a positive image of the industry and enhancing consumer
confidence.
• Maintaining high standards of ethics and governance.
• Promoting awareness of the role and benefits of life insurance.
• Organizing structured and proactive discussions with Government,
lawmakers and regulators.
• Conducting research in life insurance, publish monographs and
contribute to development of the sector.
• Acting as forum of interaction with other organizations of the
financial services sector.
• Playing a leading role in insurance education, research, training
and conferences.
• Providing help and guidance to members when necessary.
• Be an active link between the Indian life insurance industry and
the global markets.
214
ii) General Insurance Council Regulations, 2008
The General Insurance Council (GI Council) is a representative body of
general insurers including Stand-alone Health Insurers, Specialized
Insurers, Reinsurers, Foreign Reinsurer Branches (FRBs) and Lloyd’s
India, registered with IRDAI. As per Section 64C of the Insurance Act,
1938 (and amended in January 2015) all general insurers, health
insurers and reinsurers granted registration and licence by IRDAI to
carry out business in India are members of the General Insurance
Council. After the passage of the Insurance Laws (Amendment) Act in
April 2015, GI Council is a Self-Regulatory Organization for the non-life
insurance industry’s market conduct and practices.
Functions of the General insurance Council
As per Section 64L (1) of the Insurance Act,1938 the GI Council has the
following functions:
• to aid and advise insurers, carrying on general insurance business,
in the matter of setting up standards of conduct and sound practice
and in the matter of rendering efficient service to holders of policies
of general insurance
• to render advise to IRDAI in the matter of controlling the expenses
of such insurers carrying on business in India in the matter of
commission and other expenses
• to bring to the notice of IRDAI the case of any such insurer acting
in a manner prejudicial to the interests of holders of general
insurance policies.
• To bring about better co-ordination and cohesion in the general
insurance industry.
• To promote awareness about the role and benefits from general
insurance.
In exercise of the powers conferred under section 64R 2(1)(d) of the
Insurance Act, 1938 (4 of 1938), the General Insurance Council, with the
previous approval of the Insurance Regulatory and Development
Authority, hereby makes the following Regulations, namely:
b) Objects incidental or ancillary to the attainment of the main
objects:
• To promote, sponsor and support programmes and activities, and
to take action including submitting memoranda, representations
and campaigns necessary for maintaining a positive image of
the General Insurance industry through media, forums and
215
opinion makers and enhance the level of consumer confidence in
the industry.
• To study, analyze and represent to Government of India, State
Governments, Regulator or any other Authority to maintain and
enhance, development, growth and expansion of the General
Insurance sector or any other matters related to the General
Insurance business in India.
• To promote and facilitate research and development in all
branches and related activities of General Insurance business.
• To evolve and recommend innovative procedures and solutions
for legal, technical, managerial or professional activities in the
General Insurance business.
• To act as a clearing house for data collection, storage,
dissemination and exchange of data, procedures and practices to
be adopted in General Insurance business
• To provide a forum or forums for exchange of views on matters
relating to promotion of sound business practices and
promoting efficient service to policyholders in general insurance
business.
• To organize and conduct special training programmes such as but
not limited to seminars, workshops and the like for personnel
engaged in general insurance business.
• To print, publish and circulate bulletins, periodicals, booklets,
pamphlets, text books concerning the General Insurance
business.
• To subscribe and become a member of any association,
chamber of commerce or federation consistent with the
functions of the Council.
• To invest and deal with or keep in deposit the moneys of the
Council in such manner as the Council may deem fit.
• To open bank accounts and operate the same.
• To appoint, employ or engage such persons as employees or
otherwise as may be considered expedient by the Council.
15.2 INSURANCE OMBUDSMAN
The insurance ombudsman was created by Government of India in 1998
with the purpose of quick disposal of the grievances of the insured
customers and to mitigate their problems involved in redressal of those
grievances.
An insurance Ombudsman is appointed for a term of three years or till
the incumbent attains the age of sixty-five years, whichever is earlier
216
The ombudsman shall pass an award within a period of three months
from the receipt of the complaint. The awards are binding upon the
insurance companies.
If the customer is not satisfied with the award of the Ombudsman, he
can approach other venues like Consumer Forums and Courts of law for
redressal of his grievances.
At present there are 17 insurance ombudsmen across the country.
15.2.1 Insurance Ombudsman Scheme
The Insurance Ombudsman scheme was created by Government of
India for individual policyholders to have their complaints settled out of
the courts system in a cost-effective, efficient and impartial way. There
are 17 Insurance Ombudsman in different locations, and you can
approach the one having jurisdiction over the location of the insurance
company office that you have a complaint against.
15.2.2 Features of Insurance Ombudsman
• A representation should be made to the Insurance Company and

either an unsatisfactory reply should have been received or the
representation should stand as un-replied for at least 1 month.
• The complaint must be lodged within 1 year of the events.
• The total relief sought must be within an amount of Rs.20 lakhs.
• The subject matter of the complaint should not currently be or
have earlier been before a Court/Consumer Forum.
• No fees / charges are required to be paid.
• Any aggrieved individual who has taken an Insurance Policy on
personal lines (or if deceased, the legal heir(s) under such policy)
can approach Ombudsman.
• If the Ombudsman deems it fit in the circumstances of the case,
he may award ex-gratia payment.
• Complaints pertaining to repudiation of claims totally or partially,
delay in settlement of claims, any dispute on the legal
construction of the policies in so far as such disputes relate to
claims, disputes regarding premiums paid / payable and non-
issue of insurance documents.
• Insurance on personal lines means a policy taken or given in an
individual capacity, e.g. life insurance, personal accident
insurance, mediclaim insurance, insurance of personal property
of the individual such as motor vehicle, household articles, etc.
217
You can write complaint to the Ombudsman about:
•
Any partial or total repudiation of claims by an insurer
•
Any dispute about premium paid or payable in terms of the policy
•
Any dispute on the legal construction of the policies as far as it
relates to claims
• Delay in settlement of claims
• Non-issue of any insurance document to you after you pay your
premium
You can approach the Ombudsman with complaint if:
•
You have first approached your insurance company with the
complaint, and they have not resolved it OR Not resolved it to
your satisfaction OR not responded to it at all for 30 days.
• Your complaint pertains to any policy you have taken in your
capacity as an individual and
• The value of the claim including expenses claimed is not above
Rs 20 lakh.
The settlement process Recommendation:
The Ombudsman will act as counsellor and mediator and
•Arrive at a fair recommendation based on the facts of the dispute

•If you accept this as a full and final settlement, the Ombudsman
will
• Inform the company which should comply with the terms in 15
days
15.3 EDUCATIONAL INSTITUTES
Educational institutions are a mainstay in many communities. These
day-cares, schools, colleges and universities mould young minds to
transform society. This great responsibility requires great trust. Great
American has been among the most trustworthy insurance providers that
educational institutions have counted on for decades.
Educational institute insurance is a unique bundle of business coverage
that protects educational institutions from the wide range of possible
risks.
The potential risks Educational Institutes may face:
• A fire in your largest dorm requires hundreds of your students to
be temporarily housed in local hotels.
• A pipe bursts in your library, destroying computer equipment and
many books.
218
• A student driver loses control of a school’s van causing the van to
roll over resulting in multiple injuries to passengers.
• One of your tenured professors traveling in the Middle East for a
research project contracts a potentially fatal parasitic disease.
Types of insurance for educational institutions
i) Property Insurance
Property insurance is meant to compensate for losses or expenses
arising out of damage to physical property. In this case, the school
premises, equipment, furniture and fixtures and other valuable assets
Property Insurance can be purchased as an umbrella insurance or as
specific risks insurance such as fire insurance, earthquake insurance,
money insurance, and vehicle insurance, among others. Institutions may
also protect the separate assets of their business with insurance such as
electronic equipment insurance, vehicle insurance, money insurance,
furniture and fixtures insurance and more.
ii) Business Interruption Insurance

Business Interruption Insurance can provide financial coverage for
losses and expenses that arise out of any interruption in the operation of
the institution. A natural calamity, a fire or even a human error to the
electrical system of the school could lead to an abrupt halt of operations.
At times, the stoppage could be for weeks and months. In such
situations, schools could face a massive loss of revenue, loss of
credibility, and plenty of incremental expenses. Business Interruption
Insurance can ensure that the activities of the school do not stop
because of the immense financial stress.
It provides compensation for:
• Lost income
• Daily expenses
• Relocation and incremental expenses
iii) Group Health Insurance
Organizations purchase Group Health Insurance for the staff to provide

coverage for health-related issues. Health insurance provides financial
compensation to the staff at times of hospitalization. There are multiple
benefits of group health insurance:
To staff and employees
• Group health insurance policies are cheaper than individual
policies.
• Employees do not have to worry about health expenses.
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• Most group health policies do not require the insured to undergo
medical tests or check-ups
• A number of employers provide coverage for the employees’ family
members as well.
• Group health plans ensure quality health care and treatments as
companies mostly tie up with prominent hospitals.
For the education institution
• Tax benefits
• Increased productivity as the staff feels cared for
• It attracts quality professional teachers to the institution
iv) Public Liability Insurance
Public Liability Insurance provides compensation against legal claims for
bodily injury or property harm to a third party. This insurance provides
coverage against legal claims related to medical expenses, legal
expenses, lawyers’ fees, court-related expenses, and settlement costs.
15.4 TARIFF ADVISORY COMMITTEE

The Tariff Advisory Committee (―Advisory Committee‖) is a body
corporate, which controls and regulates the rates, advantages, terms
and conditions offered by insurers in the general insurance business.
The Advisory Committee has the authority to require any insurer to
supply such information or statements necessary for discharge of its
functions.
Tariff Advisory Committee (TAC) in India - controls and regulates the
rates, advantages, terms and conditions that may be offered by insurers
in respect of Indian General Insurance Business relating to Fire, Marine
(Hull), Motor, Engg. and Workmen Compensation.
• Insurance Association of India, Councils and Committees
• Ombudsmen
15.5 INSURANCE PRICING – DETERMINANTS
Any company aims to set prices to maximize its profits. This is also
referred to as optimal pricing. It is not different in the insurance sector.
Ideal pricing (or premium in insurance terminology) must cover:
• Variable costs
• Operating expenses
• Profits
Setting an optimal price depends on understanding costs, price
elasticity’s, consumer preferences, and the strategic actions of
competitors.
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Why is optimal insurance pricing important?
Setting an optimal premium price provides a competitive advantage for
the firms.
As in any industry, the price is subject to the law of demand and
supply. Since getting the best price is the top priority for insurance
customers, even a small percentage change in premium prices causes
many customers to switch providers. Therefore, optimal pricing in the
insurance sector enables profit maximization by allowing operators to
gain market share in segments of their choice (e.g. more profitable
segments).
How can a company achieve optimal insurance pricing?
As mentioned earlier, determining the optimal premium involves
minimizing variable costs, operating costs, and optimizing the desired
profit margin. For insurance practice, this means:
1. Increase the efficiency of the underwriting process (minimizing
variable costs).
2. Detecting fraudulent claims more effectively (minimizing variable
costs).
3. Minimizing the customer service, rent and other expenses.
4. Realizing the realistic profit margin that does not lead to a
reduction in the customer satisfaction. (Respect the law of supply
and demand).
15.6 INSURANCE PRICING METHODS
The premium rates set by insurance companies involve calculation
methods that incorporate the costs of insuring a person or business
while generating some sort of profit in the process.
15.6.1 Schedule Rating Method
Insurance pricing methods--also known as rate making--provide
baseline or standard rates that form the basis for pricing individual
case scenarios. Different pricing methods may rely more heavily on
baseline rates when other factors like risk and claims history are
involved.
15.6.2 Retrospective Rating Method
Some types of insurance provide protection against risks that are less
predictable than the risks covered by other types of insurance. An
example of this would be burglary insurance where the odds of
predicting how often a business would be burglarized are more difficult
than predicting health risks, such as heart disease or diabetes with
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health insurance ratings. According to This Matter, the retrospective
rating method relies more on a policyholder’s actual claims experience
when setting pricing rates as opposed to baselines, or standard pricing
rates.
15.6.3 Experience Rating Method
Experience rating pricing methods rely more heavily on a policyholder’s
past claim experience when determining what premium rates to
charge. The types of insurance that use this method include
automobile, workers compensation and general liability insurance.
Price rates are determined according to a credibility factor, which uses
a person’s past claim history as an indication of the level of risk
involved and the likelihood that future claims will be filed. Once a risk
level is determined, the credibility factor is measured against a
baseline pricing rate that represents to average rate charged to a class
of policyholders that have similar characteristics.
LET US SUM UP
Life Insurance Council is a forum that connects the various stakeholders
of the sector. It develops and coordinates all discussions between the
Government, Regulatory Board and the Public. In short, it is the face of
the Life Insurance industry
CHECK YOUR PROGRESS
1. The financial year of the council shall be from ____ of each year to
the ____of the following year.
a) 1st day of April,31st day of March
b) 2 nd day of April,31st day of March
c) 3 rd day of April,31st day of March
d) 1st day of April,31st day of May
2. There are ____ insurance ombudsman scheme in different locations
a) 17 b) 18 c) 19 d) 21
3._____ insurance is a unique bundle of business coverage that protects

educational institutions from the wide range of possible risks.
a) Educational Institution b) Private Institution
c) Government Institution d) Both
4. General insurance council regulation sin the year ____.
a).2008 b) 2009 c) 2012 d) 2013
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5.______is a forum that connects the various stakeholders of the sector.
a) life insurance council
b) general insurance council
c) miscellaneous insurance
d) private insurance council
GLOSSARY
Insurance : To resolve disputes and complaints from the
ombudsman aggrieved insured public.
council
Tariff Advisory : It controls and regulates the rates, advantages,
Committee terms and conditions that may be offered by
insurers in respect of Indian General Insurance
Annual General : Council shall be held each year not later than
Meeting three months after the closure of the financial
year.
Educational : It faces potential threats, such as damage to
institutes property and injury due to accidents on their
premises
Council : It means the General Insurance Council as stated
in clause (b) of section 64C of the Act.
SUGGESTED READINGS
Limited
Limited
WEB RESOURCES
1. What to do if Insurance Claim is rejected? In Tamil - What is
INSURANCE OMBUDSMAN in Tamil. - YouTube
2. How to make Online IRDA Grievance | IRDA Ombudsman | IRDA
IGMS Insurance Complaint | Info Tech Tamil - YouTube
3. I Got My 1 Lakh Money Back From Insurance | Ombudsman
Bangalore Vs Bharti AXA Fraud |Scams |Part - 2 - Bing video
1.a) 2..a) 3.a) 4.a ) 5.a)
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BLOCK 5
RISK MANAGEMENT
UNIT 16: INSURANCE CUSTOMERS AND ETHICAL BEHAVIOUR

UNIT 17 : RISK MANAGEMENT- INSURANCE
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UNIT 16
INSURANCE CUSTOMERS AND ETHICAL
BEHAVIOUR
Structure
Overview
Learning Objectives
16.1 Introduction to Insurance Customers
16.2 Key customer categories in insurance
16.3 Types of Insurance Customers
16.3.1 Individual Insurance
16.3.2 Individual Risk Exposures
16.3.3 Advantages of Individual Insurance

16.3.4 Corporate Insurance
16.3.5 Advantages of Corporate Insurance
16.3.6 Types of Corporate Insurance

16.3.7 The Difference Between Individual & Business
Insurance
16.4 Nature of Insurance Customers
16.5 Mindset as to Insurance
16.6 Insurance as Investment
16.7 Insurance Risk Management
16.8 Types of Risks in Insurance
16.9 Compulsion Vs. Voluntarism
16.9.1 Compulsion
16.9.2 Voluntourism
16.9.3. Deductibles in Car Insurance
16.9.4 Difference between Compulsory Deductible and
Voluntary Deductible
16.10 Ethical Behaviour
6.10.1 Ethics in the Insurance Industry
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6.10.2 Common Unethical Insurance Practices
Let Us Sum Up
Check Your Progress
Glossary
Suggested Reading
Answer to Check Your Progress
OVERVIEW
The basic concept of insurance is that one party, the insurer, will
guarantee payment for an uncertain future event. Meanwhile, another
party, the insured or the policyholder, pays a smaller premium to the
insurer in exchange for that protection on that uncertain future
occurrence. A customer profile is a simple tool that can help business
better understand current and potential customers, so they can increase
sales and grow their business. Customer profiles are a collection of
information about customers that help determine why people buy or
don't buy a product.
LEARNING OBJECTIVES
• get insight knowledge on insurance customers and its various

types
• explore the nature of insurance customer
• assess the insurance as an investment avenue
• explain the insurance risk management
• comprehend the concept of Compulsion Vs. Voluntarism
• evaluate the ethical behaviour in the insurance industry.
16.1 INTRODUCTION TO INSURANCE CUSTOMERS
Insurance aims at minimisation of losses arising from future risks and
uncertainties. It adds certainty of payments to people for happening of
uncertain events. Insurance assures the individuals for compensation of
losses. It minimises the risk through proper planning and
administration. The prime objective of customer service is to answer
customer questions quickly and effectively, resolve issues with empathy
and care, document pain points to share with internal teams, nurture
relationships, and improve brand credibility. Customer as a person who
buys goods or services from another person while a client is a
person or group that uses the professional services of a lawyer,
architect, or other expert.
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Individual Insurance is a health policy that the policyholder can
purchase. Individual policies are also called personal health plans. The
person one who buys policies for his/her personal use is said to be as
Individual Insurance Customers.
Regulatory Compliance
Insurance industry regulations change often, and compliance is
mandatory. For instance, there are regulations such as CCPA and
GDPR for data privacy and security; accounting standards such as IFRS
and GAAP. There are also certain market conduct regulations such as
New York‘s Regulation 187 that places certain responsibilities on
insurers. Insurance providers need to be extremely vigilant in adhering
to the strict guidelines imposed by these regulations in order to be
compliant.
An insurance regulatory compliance specialist is sometimes also known
more simply as a compliance specialist, compliance officer or even a
compliance analyst. As the name implies, these professionals monitor
changes in all jurisdictions to ensure the insurance company, its
employees and its contractors remain compliant.
In its simplest form, the main purpose of this professional is to ensure

the organization does not get cited, fined or sued for failure to comply
with regulations. These cases can not only be costly but could also lead
to bad publicity for the company. In today’s business market, a bad
public image is sometimes much harder to recover from than a big
payout.
One of the keys to a successful business lies not only in the products or
services but also to loyal customers. This is especially true for the
insurance industry — an industry that relies greatly on its customer
base. To keep the business afloat, companies from this sector should do
their best to attract more customers while retaining the existing ones.
This is why good customer service in the insurance industry is important.
16.2 KEY CUSTOMER CATEGORIES IN INSURANCE
Consumers & Small Businesses focuses on nine key customer types
that will define the market on the road to 2030. These customer
categories frame both the formidable challenges and unique
opportunities insurers face in a highly dynamic market. Of course, not
every insurer will focus on all nine of these groups. But there are
common themes across them, including the need for tailored coverage,
personalized service and richer digital experiences – all of which add up
to increased value. The nine groups are:
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Consumers
1. Point-of-sale purchasers
This group values the peace of mind that comes from knowing that the
items they buy – consumer goods, jewellery, travel or concert tickets –
are protected from the moment they’re purchased. Embedded finance
and a growing market for point-of-sale insurance mean insurers can
reach more customers, demonstrate the value of insurance and increase
their relevance.
2. Virtual vanguards
With more people spending more time in the metaverse, there is rising
demand for protections that cover digital assets (e.g., crypto keys, virtual
identities and brands). Insurers can connect “metazens” by offering
bulletproof identity protection that prevents hacks, breaches and theft;
business interruption coverage for virtual events; and fully integrated
“virtual life insurance,” which could be attractive for influencers.
3. ESG devotees
Some businesses view environmental, social and governance (ESG) as
primarily a regulatory matter, but more consumers are putting their
money where their values are. Specifically, they want to do business
with environmentally and socially engaged companies and avoid those
that are greenwashing. They are willing to pay a premium for products
and services that match their value.
4. Bubble protectors
More consumers want holistic and dynamic coverage for entire lifestyles
or “bubbles.” Designing integrated coverage for autos, homes, health,
microbusinesses, appliances, travel, identities, and major new
purchases is complex, but offers plenty of new revenue and stronger
long-term relationships for insurers that get it right.
5. Data capitalists
Consumers are increasingly aware of the value of their personal data
and expect more in return for sharing it. Insurers can engage this
segment via customized offers, proactive insights for risk prevention and
protection management with a portfolio of coverages that changes
based on life events. The first step, though, is full transparency about
data usage
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6. Minimalists
Looking to win entry-level business with budget-conscious consumers
requires simple, understandable policies that are affordable and
available via intuitive digital experiences. The end goal is to engage
these customers for the long term, broadening and deepening the
relationships as bigger risks emerge in their lives. By demonstrating the
value of insurance and proving it can be affordable, insurers can both
grow their business and protect the underserved.
Small Businesses
7. Work-life integrators
By offering tailored protections for gig workers and small home-based
businesses, insurers can boost their relevance with solutions that reflect
how people live and work today. Such coverages must be easily
adjustable and reasonably priced, and solutions for gig workers in
specific sectors and roles (e.g., delivery and graphic design) are likely to
gain traction.
8. Efficient entrepreneurs
Today, commercial insurance options don’t necessarily reflect the huge
number and diversity of small- and medium-sized enterprises. The
priorities for helping small businesses manage proliferating risks are
real-time cyber insurance, plus monitoring and recovery services, and
real-time, dynamic and usage-based pricing for certain operations. Every
small business will appreciate 24/7 digital support and access to expert
advice when necessary.
9. Conscious owners
Like the ESG devotees in personal lines, small-business owners are
increasingly focused on sustainability. These customers are most drawn
to insurers that have sector-specific expertise and services that help
them further “green-up” their businesses. An authentic commitment to
ESG and true depth of understanding of the risks they face, along with
ecosystems of solutions to cover those risks, will drive further
engagement and loyalty.
Though not every insurer will serve the full range of customers,
those that put customers at the core of their business will gain a
competitive edge. They’ll also need to master a few crucial
capabilities:
• Real-time risk protection: AI, machine learning, automation,

digital platforms and data analytics enable insurers to deliver
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personalized protections and services – instantaneously and at
scale – in homes, vehicles or anywhere.
• Ecosystems and partnerships: As industry lines blur and
barriers to entry fall, insurance will become ubiquitous for all
types of purchases and companies; insurers can orchestrate
their own ecosystems and embed in those led by others.
• New risks necessitating new products: Evolving societal
norms and cultural values – from the rise of ESG issues to
personal data ownership to virtual worlds – have created new
risks and thus require product innovation from insurers to provide
the necessary coverages.
16.3 TYPES OF INSURANCE CUSTOMERS
16.3.1 Individual Insurance
Individual insurance refers to any policy that is chosen and paid for by
the policyholder. This is in contrast with group insurance, which might be
chosen beforehand by someone else, like an employer who assigns a
specific health insurance for all of their employees.
I) Functions of Individual Insurance
The main function of insurance is to protect the probable chances of

loss. The time and amount of loss are uncertain and at the happening of
risk, the person will suffer the loss in the absence of insurance. The
insurance guarantees the payment of loss and thus protects the assured
from sufferings.
II) Risk management strategy for individuals
Risk management for individuals is the process of identifying threats to
the value of household assets and developing an appropriate strategy
for dealing with these risks. The risk management strategy provides a
framework that allows a household to decide when to avoid, reduce,
transfer, or self-insure those risks. There are typically four key steps in
the risk management process:
a) Specify the objective.

b) Identify risks.
c) Evaluate risks and select appropriate methods to manage the risks.
d) Monitor outcomes and risk exposures and make appropriate
adjustments in methods.
a) Specify the Objective
The overarching objective of individual risk management is to maximize

household welfare through an appropriate balance of risk and safety.
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Risk represents a possible decrease in future spending caused by
unexpected events, such as a market crash, a physical disability, the
premature death of a primary earner, or health care expenses. As with
investments, this objective is achieved by deciding how much risk a
household is willing to bear in order to achieve its long run spending
goals.
b) Identify Risks
Households face a significant number of risks, including earnings,
premature death, longevity, property, liability, and health risks. Each of
these risks is associated with a potential loss of financial and/or human
capital, and individuals should address each of them to determine how
best to address the possibility of loss.
c) Evaluate Risks and Select Appropriate Methods to Manage the
Risks
The existence of a risk exposure does not necessarily require the
purchase of an insurance product. The appropriate risk management
strategy considers the magnitude of the risk and the range of options
available to address that risk. Risk avoidance involves avoiding a risk
altogether. For example, one way to avoid the risk to human and
financial capital from riding a motorcycle is to simply not own or ride one.
Risk reduction involves mitigating a risk by reducing its impact on an
individual's welfare, either by lowering the likelihood that it will occur or
by decreasing the magnitude of loss (for example, by wearing a helmet
when riding a motorcycle). Risk retention involves retaining a risk and
thus maintaining the ability to finance the cost of losses; when funds are
set aside to meet potential losses, the individual is said to be self-
insured.
d) Monitor Outcomes and Risk Exposures and Make Appropriate
Adjustments in Methods
Appropriate risk management method has to be selected, be monitored
and updated as the household moves through the life cycle. It is
advisable to annually review an insurance/risk management program,
including all the ongoing risk exposures and risk management methods.
As an individual's goals and personal and financial situation change,
these changes will affect risk exposures and optimal risk management
strategies. In addition to an annual review, every life change such as a
birth, marriage, inheritance, job change, relocation, divorce, or death
should trigger a review of the risk management plan.
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The simple answer is that there is no static ‘right ’portfolio. Instead, your
‘right ’or optimal portfolio evolves based on your stage of life and unique
circumstances. To better understand the idea, we divide an adult’s
lifetime into four periods that roughly reflect an individual’s financial
stages of life:
1. Early career (Age 18-35)–Under ideal conditions, you’d invest as
much as you can at the earliest stage of your career to benefit from
compounding interest over a long period of time. However, in reality,
it’s not that simple. At this stage, your salary may be low, your
savings minimal and you may have competing priorities. For
shorter-term goals, such as saving to buy a car or house, you’d
want to take on less risk and have more liquidity in your
investments.
It may be hard to think about long term goals here, but you need to
consider that at this stage, your ability to tolerate risk is high. You
have a long investment horizon, which means you have time to
make up for any potential losses you may experience early on. Also,
there are fewer financial obligations (e.g. mortgage, dependents),
allowing you flexibility with regards to short-term portfolio risk. As
such, your optimal portfolio should have a higher allocation to more
risky assets such as stocks, and a lower allocation to less risky
assets such as bonds.
2. Career development (Age 35-50)–This phase is often where you
experience upward career mobility and income growth. At this point,
if you’re married and have kids, you may be working towards
funding your children’s education. You should also start focusing on
more long-term goals such as planning for retirement with annuities
and protecting your family with adequate insurance coverage. As
your income grows together with your household expenses, you
have higher liquidity needs and your investment horizon is shorter
than before. Your portfolio should be restructured to accommodate
these changing priorities by increasing your allocation toward lower
risk investments and reducing your initial allocation to high-risk
assets.
3. Peak accumulation and pre-retirement (Age 51-60)–At this point,
most people either have reached or are moving toward maximum
earnings. You should evaluate your progress thus far to determine
whether you’re on track to meet your retirement goals or not. If
you’re not, you may need to extend your retirement date, reduce
your spending or adjust your portfolio strategy accordingly. Many
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people in this phase continue to restructure their portfolios to reduce
risk and may consider investments that are less volatile. The reason
for this reduction in risk is to safeguard your retirement funds from
large dips in asset prices.
4. Retirement–Finally, you’ve made it and if you’ve maintained your
discipline throughout the earlier years, you should have sufficient
assets to meet living expenses and be able to comfortably enjoy the
wealth you’ve accumulated. If you haven’t, it’s still not too late to
start. You should note that the need for asset growth does not end
here. For many households, the length of retirement could exceed
20 years; and given this potential horizon, it is important to continue
taking an appropriate level of investment risk. After the initial 10
years of retirement, the ‘late retirement phase’ becomes especially
unpredictable. This risk of outliving your funds (longevity risk) can
be mitigated through the use of annuities.
a) Pre-Retirement
At age 50, evaluate your savings and retirement plans. Make
catch-up contributions if you are behind. Adjust plans to account
for major expenses like college tuition and increased health care
costs. Maintain a portion of your portfolio in funds that can
appreciate to take advantage of the time you have for the growth
of your assets.
This is also a great time to plan for the costs and burdens of
aging. You have already noticed changes in your health and body
at this point. You will see even more changes as you get older.
These changes will lead to long-term health care. This care is
expensive and can place tremendous burdens on your family.
For many people, affordable Long-Term Care Insurance will be
part of the plan. You can research more about long-term care
planning by clicking here.
b) Early Retirement
Woo-hoo! You made it! Your biggest task is to resist the
temptation to overspend. Be conservative in what you draw from
your retirement savings. Focus on your major goals rather than
frittering money away on little things.
Many early retirees are still full of energy and take “third act” jobs
to keep their hand in the working world, or even start new
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businesses of their own. But be careful not to invest in
overambitious or unrealistic plans.
16.3.2 Individual Risk Exposures
• Earnings risk refers to the risks associated with the earning
potential of an individual—that is, events that could negatively
affect the individual’s human and financial capital.
• Premature death risk, referred to as mortality risk, relates to the
death of an individual earlier than anticipated whose future
earnings, or human capital, were expected to help pay for financial
needs and aspirations of the individual’s family.
• Longevity risk, relates to the uncertainty surrounding how long
retirement will last and specifically the risks associated with living
to an advanced age in retirement
• Property risk. Property risk relates to the possibility that a
person’s property may be damaged, destroyed, stolen, or lost
• Liability risk, refers to the possibility that an individual or
household may be held legally liable for the financial costs
associated with property damage or physical injury
• Health risk, refers to the risks and implications associated with
illness or injury
16.3.3 Advantages of Individual Insurance
Insurance provides economic and financial protection to the insured

against the unexpected losses in consideration of nominal amount called
premium. It provides financial protection to the nominee in case of the
pre-matured death of insured.
16.3.4 Corporate Insurance
Corporate insurance is a type of insurance cover usually used by large
organisations to protect their business against operational risks such as
theft, financial losses, employees' health and accidents. It is
comprehensive business insurance that benefits the past or present
employees as well as the company itself.
16.3.5 Advantages of Corporate Insurance
Corporate insurance primarily protects the company from the loss of
income caused because of any severe disasters. Corporate insurance is
needed to protect the physical assets of the company, such as furniture,
computers, stock, etc. to be compensated for any damages by natural
disasters or loss by theft.
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16.3.6 Types of Corporate Insurance
a) General Liability Insurance
General Liability Insurance is the basic among all types of corporate
insurance. This type of insurance covers the financial cost of legal
liability arising as a result of damage or loss caused to a third party by
the business enterprise’s operations. The cost of defending against the
lawsuit or compensation paid to the aggrieved party for bodily injury,
property damage, libel, or slander is covered by general liability
insurance.
b) Professional Liability Insurance
Professional Liability Insurance is one of the important types of
corporate insurance for companies engaged in providing services to
customers. This type of insurance protects the business against financial
losses caused by lawsuits arising due to negligence or mistakes in
rendering the services. It is also known as Errors and Omission
insurance.
This kind of insurance is specific as per the profession. Doctors, lawyers,
insurers, accounting firms, and financial institutions commonly opt for
professional liability insurance.
c) Product Liability Insurance
Product Liability Insurance is one of the most important types of
corporate insurance for companies that manufacture products for mass
consumption. This type of insurance protects the business against
financial losses caused by product liability claims in the event of the
product causing injury or bodily harm to its consumers.
Even if a company adheres to strict manufacturing standards and quality
control, there is still a risk that a defective product can harm consumers.
Hence, it is better to be on the safe side by purchasing product liability
insurance.
d) Property Policies
Property insurance policies help business owners in recovering the costs

of damaged properties. Apart from covering the cost of repairing or
replacing the business property, property policies also compensate for
the loss of income due to business interruption and loss of computers,
documents, or the company’s cash. Thus, property insurance is also
ranked among the important types of corporate insurance.
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Comprehensive coverage policies cover events leading to property
damage such as fire, storm, vandalism, etc. On the other hand, Peril-
specific policies provide compensation for specific peril-induced property
damage.
e) Vehicle Insurance
The private vehicles belonging to the employees of a business
enterprise must be insured. Personal vehicle insurance covers the
employees in an accident or other damages.
f) Commercial Vehicle Insurance
Commercial vehicle insurance is mandatory for any vehicle which

provides commercial service to a business enterprise. This type of
corporate insurance provides financial compensation against damages
caused to the driver or vehicle or third party due to accident, collision,
fire, theft, and other mishaps.
g) Business Interruption Insurance
Business Interruption Insurance is one of the desirable types of

corporate insurance for businesses operating out of physical locations
such as retail shops. Events such as riots or natural calamities, or others
can lead to disruption of business operations due to the inability of the
workers or customers to reach the business location. This leads to a loss
of revenue.
The purpose of business interruption insurance is to cover the losses
suffered during the period of business interruption. Once the losses are
covered, the business can start again.
h) Cover for Loss of Income
This type of corporate insurance helps the business pay the fixed costs
during the period of business inactivity in the aftermath of a natural
disaster, fire, or any other mishap.
i) Employee Insurance Policies
• Employee insurance policies also come under the categories of
various types of corporate insurance. Some of the common types
of employee insurance policies have been listed here.
• Worker’s Compensation Insurance protects the employees against
financial losses caused by work-related injury or illness. The policy
pays the medical expenses, compensates for the loss of income if
the employee misses work, covers ongoing therapy costs, and
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pays the funeral costs if the employee loses his/her life due to
work-related injury or illness.
• Employee Health Insurance is a group health insurance that covers
the employees’ medical expenses in the event of hospitalization.
Each employee gets the same benefits and insured amount. The
employer is eligible for tax deductions on the premium paid for
employee health insurance.
• Personal Accident Insurance provides financial security to the
employees in injuries caused by accidents. The policy covers the
cost of treatment of the accident injuries, 50% of the sum insured in
case of partial disability, 100% of the sum insured in case of a total
loss of vital limbs, and the entire sum insured in the event of
accidental death.
j) Data Breach Insurance
Data Breach Insurance is one of the new types of corporate insurance.
This insurance covers the business if a data breach causes the loss of
the personal information of its customers or sensitive business data. The
policy covers the cost of notifying the affected parties and installing an
advanced security system to protect the data.
k) Umbrella Insurance
Umbrella insurance increases the coverage limits of liability insurance
policies. This type of corporate insurance becomes useful when a
liability claim exceeds the liability insurance policy limit. The umbrella
policy covers the balance amount.
m) Directors and Officers Insurance
Directors and Officers Insurance is one of the lesser-known types of
corporate insurance but is highly useful for directors and officers of
business enterprises. This type of insurance protects directors and
officers against financial losses caused by lawsuits against them in the
event of their decisions harming other entities, including their own
employer companies.
16.3.7 The Difference Between Individual & Business Insurance
Business insurance protects the property of a business, and it provides
protection when the business becomes legally liable for injuries that
occur on the property. An individual may acquire insurance to protect his
property that is unrelated to a business.
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a) coverage for business
Business insurance provides coverage for expenses related to the
business. These business expenses can result from damages to
supplies, equipment, company vehicles and the premises of the
company. The policy includes property insurance, vehicle insurance and
liability insurance.
b) personal insurance for business
A personal insurance policy can provide coverage for an individual to
protect the assets of the business. It can cover expenses if the business
owner or other significant employee suffers a disability that prevents him
from performing essential duties of the business enterprise.
c) individual insurance
An individual or personal insurance policy can provide coverage and
protection for an individual’s personal property unrelated to a business.
For instance, an individual insurance policy may incorporate a
homeowner’s policy, liability insurance and a personal automobile policy.
16.4 NATURE OF INSURANCE CUSTOMERS
1. They are in control – with the price transparency created by
aggregators, lots of new entrants to the market and the ease of
swapping providers, the insurer is now at the consumer‘s beck and
call
2. They are well educated – with the ease of online pre-purchase
research and the plethora of alternative information sources such
as blogs and social media about insurance products available,
there is not the same level of need for brokers and financial
advisers as previously
3. High experience expectations – they are used to the personalised,
consistent, easy and often fun experience offered by the data
giants of the day (online and retail industries in particular) and
these expectations transfer to their insurance provider also.
4. They expect authenticity – any communication must be relevant,
personalised and engaging, for example Aviva‘s Drive app
encourages good driving and delivers personalised scores for
premium discounts, rather than communicating for the sake of it.
By nature, insurance is a devise of sharing risk by large number of
people among the few who are exposed to risk by one or the other
reason. If a large number of subscribers to insurance serve the purpose
of compensation to few among them exposed to uncertain risks appears
as a co-operative look.
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1. A Contract
The most important feature of insurance is that it is legal contract
between the insurer and insured, under this insurer promises to
compensate the insured for the loss which is mentioned in the policy and
the insured promise to pay a fixed rate of premium which is
consideration in this contract for the promise of the insurer. It is a type of
contract where one party agrees to compensate in case of loss suffered
by another party.
2. Undertaking of Risk
In insurance contract, bearing and protecting of risk is the subject matter
of the contract. For example, paying of insured amount in case of death
of the assured, loss by fire or happening of marine perils. The risk is
undertaken by the insurer to compensate the insured on the happening
of the risk mentioned in the policy. The insurance company bears the
risk and make good the loss. It restores the person standing as it was
before the loss, it provides a mental relief to the insured that in case of
loss, the insured will undertake his risk.
3. A Cooperative Device
Insurance is cooperative device of sharing the burden of risk

of one on the shoulders of many. All the insured contribute the premium
out of which the person who actually suffers loss is compensated or is
paid up, insurance is a device to share the financial loss of few among
many others.
4. Payment of policy amount on the happening of events
On the happening of a specified event, the insurance company is bound
to make good the loss to the insured. Happening of an event is specific
in life insurance that is death, but it is not so in case of marine, fire or
accidental insurance. In life insurance, a fixed amount is paid but in
indemnity insurance (fire, marine, etc) amount of payment is uncertain
depending upon the quantum of damage.
5. Premium
Payment of premium by the insured is another feature of an insurance
contract. Like other contracts, the factor of consideration is fulfilled by
the premium because it is the subject for which insurer promises to
undertake or bear the risk if insured. In absence of premium, the
promise will be NUDAM PACTUM, hence void. To conclude insurance is
a method to transfer the risks from insureds to insurers who agrees to it
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for a consideration known as premium and promises to bear and
compensate the insured on the specified extent of loss.
6. Contract of Adhesion
It means it is contract which is not arrived by mutual negotiations
between the parties, It means he has to adhere to the policy in which
way it is offered there is no chance if bargain. It means the insured
accepting the policy must accept whole of it he cannot accept one part of
and leave the another. All he can do is that he can select the most
appropriate policy among various policies which the insurer is offering.
7. Development of Larger Industries
Insurance helps industries to develop who have more risk in their setting
up, the owner may get the industries assets insured and in case of loss
he will be compensated. The financial institution may be ready to give
credit to such industrial units which have insured their assets including
plant and machinery etc.
8. Provide Protection
Insurance provides protection against future risk, accidents, uncertainty.
It protects the insured against all the losses which are specified or for
which the insurance is done.
16.5 MINDSET AS TO INSURANCE
As insurers try to transform themselves and stay competitive amid this
dynamic environment, there are six distinct levers that determine the
success of these efforts. These six levers constitute the six dimensions
of what we might call the Insurance Cube, to understand the
buyers‘mindset. The first three faces of the cube are trends in
technology, regulations, and business models. The other three are
factors are risk, efficiency and speed.
(a) Technology Readiness
Technology is an enabler. It is about two things: data and the
intelligence around the data. Over the next five years or so, there is
going to be an astounding acceleration in the intelligence layer of
technologies. We have all heard the buzzwords: AI and machine
learning.
The goal for insurers is to use these emerging technologies to
underwrite products online without human intervention. At least to the
point where human intervention is just a final checkpoint. However, if
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you think about it, online experiences mean that the underwriting
function must happen in real-time.
(b) Regulatory Compliance
Insurance industry regulations change often and compliance is
mandatory. For instance, there are regulations such as CCPA and
GDPR for data privacy and security; accounting standards such as IFRS
and GAAP. Insurance providers need to be extremely vigilant in
adhering to the strict guidelines imposed by these regulations in order to
be compliant.
(c) Business Models
Given changing consumer demands as well as an evolving technology
landscape, insurance companies need to constantly re-invent
themselves by exploring new business models. Whether it is adoption of
a new value chain or delivering new-age ―phygital‖ (physical + digital)
experiences, companies need to think like disruptors. The disruption
may not be just in the immediate industry but could also be a cross-
industry disruption. For example, lot of the insurance carriers is moving
away from agent-based physical selling to phigital selling.
(d) Risk
Every business has to deal with a certain number of risks such as
location risks, market risks, concentration risks etc., and insurance is no
different. Given the fast pace of change, companies might also face
certain talent risks or the risk of technology debt. Each of the risks listed
above has the potential to snowball into a major issue that could
threaten the organization‘s survival. Given this, the ability to mitigate
risks and prepare back-up plans is the key for survival of insurance
players.
(e) Efficiency
Running a highly efficient business is a huge operational advantage for
insurance companies. Efficiency, whether it is cost efficiency or
operational efficiency, can be achieved in a number of ways such as
through cost takeout by rebadging existing deals. Automation is an
important tool to increase operational efficiency. On the people front,
building a futuristic workforce by enabling people with the right tools,
data, and training can help to greatly increase productivity and
efficiency. Leveraging ecosystem partnerships can help streamline
processes and make the organization more efficient. For instance, a
leading international reinsurance and insurance group was keen to bring
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in efficiencies through new age technologies to achieve cost
optimization.
(f) Speed
In a competitive environment, the speed at which a company responds
to change matters. Quick product introductions provide a first mover
advantage. Similarly, it is important that timeline-based market
commitments are honored. Distributed agile adoption can help greatly
speed up response times for insurance companies.
While each of these factors is definitely interconnected, evaluating a
company on each of these separately can provide a useful framework to
determine competitive readiness. It can also be a useful guide to
determine strategies for the future.
16.6 INSURANCE AS INVESTMENT
Insurance is the claimed to be the best option for investment. It is a
form of investment that is stable as long as the premiums are paid. In
case of life insurance, for example, your beneficiary will obtain a death
benefit upon an event of your untimely demise. This benefit is called
"face value" and the premiums that need to be paid should surpass its
value. The additional funds go into an account and are invested by the
insurance corporation on your behalf, which means that if the insurance
investment is profitable, the cash account will augment over the years.
There are different types of insurances; it is essential to familiarize with
them prior to opting. As with any kind of investment insurance
investment option also has its benefits and detriments.
• Investment in life insurance
Any permanent life insurance policy with a cash value, such as
whole life insurance, can be used as an investment vehicle. But for
most people, it isn’t a good strategy.
While the cash value of permanent life insurance can be treated as
an investment, the high cost, associated fees, and expensive
penalties mean it’s usually not an effective way to grow your
money. The cash value is a tax-deferred savings account that gains
interest and grows over time, but every policy is different in how the
cash can grow or shrink.
• Ensuring risk cover
Insurance coverage is the risk coverage for an individual by way of
insurance services. An insurance cover helps an individual or an
entity to protect themselves from unforeseen occurrences. It acts as
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a safety net protecting the policyholder and the family from
unexpected situations.
To be covered under insurance, an individual has to pay a small fee
monthly or annually for a certain period. In return, the insurance
company will pay for the financial damages in case the person or
object insured is damaged. By paying a small fee, one can transfer
their financial risk to the insurance company.
• Building the habit of saving
A life insurance investment is a long-term commitment. Life
insurance plans generally have premium payment terms spanning
several years which inculcates financial discipline in the
policyholder. Policies with investment components force you to save
regularly to achieve life goals.
• Saving on income tax
Life insurance premiums make you eligible for deductions* on your
taxable income. As per Section 80C of the Income Tax Act, 1961,
you can avail deductions up to ₹ 1.5 lakh for such premiums. If you
add a health-based rider with your life insurance plan, you can get
further deductions up to 25,000 under Section 80D.
Moreover, the proceeds from life insurance are also exempt from
taxes* under the provisions of Section 10(10D). These benefits, not
generally found in other investment products, can reduce your
income tax liability and effectively increase your savings.
• Protecting your money
Many life insurance plans guarantee a sum assured. Such plans
keep your hard-earned money safe from market conditions. Many
reputed insurance companies also offer bonuses, helping your
investments grow. The returns from life insurance plans can help
you meet your life goals, such as children’s higher education, or
financial freedom in retirement.
• Navigating the capital market
ULIPs allow you to switch your funds around different asset classes.
In a downturn, you can shift your allocations to debt funds,
minimising losses. When the market recovers, you can change over
to equities, and see your profits soar. You also have the option to
switch to better-performing funds. By remaining patient and
continuing investing throughout your policy tenure, you can earn
excellent profits.
• Gain peace of mind
While wealth can give you the lifestyle you want, peace of mind is
priceless. Life insurance guarantees this peace. Buying life
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insurance assures you that your loved ones’ needs will be met in
every exigency.
16.7 INSURANCE RISK MANAGEMENT
Insurance Risk Management is the assessment and quantification of
the likelihood and financial impact of events that may occur in the
customer's world that require settlement by the insurer; and the ability
to spread the risk of these events occurring across other insurance
underwriter's in the market. Risk Management work typically involves
the application of mathematical and statistical modelling to determine
appropriate premium cover and the value of insurance risk to 'hold' vs
'distribute'.
Risk management involves loss control, loss financing, and risk
reduction. Loss control is a loss prevention method that reduces the
frequency of loss. Control devises to prevent loss are installed on a
property to prevent fire.
i) Need and Objectives
Risk management is essential to prevent financial disasters and
achieve the objectives of capital management. The success must be
sustainable, for which risk has to be prevented and managed.
The aspirations of insurance customers can be easily met if the risk is
properly managed. It helps right things performances and assists in
carrying out the duties of care, loyalty, and good faith. The competition
is beaten over by proper planning of risks.
ii) Principles of risk management
The principle of risk management includes top-level involvement, a
culture of accountability, risk prevention, appropriate control, discipline,
and forecasting of negative events. Investment and accountability are
important factors in risk management. Let’s know the principles of risk
management.
iii) Investment
Risk management is embedded in the insurance industry from the date

of a proposal to the final payment of claims. After the sale, services
reveal the techniques of risk management. It reveals the investment
process in Industry itself and discovers the principles of risk
management.
The senior managers have knowledge of risk and risk management
techniques. There is a set procedure e.g., LIC has agents’ manuals to
guide them on how to identify the risk and manage it properly. The
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L.I.C. provides oversight integration, coordination, and consolidation of
corporate functions, Many companies have a separate department of
risk management.
iv) Accountability
The responsibility vested in the executive reduces the risk and forces
them to manage risk. There are rating agencies (Tariff Advisory
Committee) analysts, surveyors, etc. who evaluate the risk.
Management is responsible for identifying the risk setting the risk limits
implementing the process to back and identify new risks.
16.8 TYPES OF RISKS IN INSURANCE
These are various types of risks in insurance:
1. Financial and Non-Financial risk
Financial risk includes those risks whose outcomes can be measured in
monetary terms. In this type of risk, loss of a person/thing is
compensated by paying money to the person after proper assessment
of loss. Eg: Damage or stealing of a property like a motorcycle, car,
machinery, cash etc.
On the other hand, non-financial loses are those that cannot be
measured in monetary terms.
2. Pure risk and speculative risk
Pure risk is an accidental risk that results in the physical loss of the
insured. The probability of the occurrence of physical risk is very high.
These risks can be the result of human negligence, natural disaster,
communal riots, strikes at the workplace, sudden breakdown in a
manufacturing unit, fall of the country, etc. In pure risk, the outcome will
be either be a loss or no loss, there is no gain in pure risk. The outcome
is never favorable for the insured. Eg: loss in business due to damage
to resources.
Speculative risk works on speculations. The cause of these risks is
mere speculation. The goal of these risks is to make a profit. In
speculative risk, there is a possibility for the insured to get profit
however loss can also occur. These types of risks involve investing in a
share market, setting up a new business, etc.
3. Fundamental risk and Particular risk
Fundamental risks are the risks that are dependent on nature. These
are the risk arises from natural calamities and can’t be controlled by any
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individual or group. The loss caused by such factors is unpredictable; it
can be either a huge loss of money and lives or it can cause small loss.
Eg: Flood, earthquake, etc
Particular risks are the risks that are caused by a group of people and
are not natural. It includes causes like communal riots, terror attacks,
etc which are not created and controlled by nature.
4. Credit Risk
The risk that a customer, counterparty, or supplier will fail to meet its
obligations. It includes everything from a borrower default to supplier
missing deadlines because of credit problems.
Credit risk is the change in value of a debt due to changes in the
perceived ability of counterparties to meet their contractual obligations
(or credit rating). Also known as default risk or counterparty risk, credit
risk is faced by lending institutions like banks, investors in debt
instruments of corporate houses, and by parties involved in contractual
agreements like forward contracts. There are independent agencies
that assess the credit risk in the form of credit ratings.
Credit rating is an opinion (of the credit rating agency) on the ability of
the organization to perform its contractual obligations (pay the principle
and/or interest of the loan) on a timely basis. Each level of rating
indicates a probability of default.
Credit risk can be further segregated as:
a) Direct Credit Risk – due to counterparty default on a direct,
unilateral extension of credit
b) Trading credit risk – counterparty default on a bilateral
obligation (repos)
c) Contingent credit risk – counterparty default on a possible
future extension of credit
d) Correlated credit risk – magnified effect
e) Settlement risk – failure of the settlement conditions
f) Sovereign risk – due to government policies (exchange
controls)
5. Market Risk
The risk that process will move in a way that has negative
consequences for a company. Market Risk is the change in value of
assets due to changes in the underlying economic factors such as
interest rates, foreign exchange rates, macroeconomic variables, stock
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prices, and commodity prices. All economic entities that own assets
face market risk.
For example, bills receivable of software exporters that are
denominated in foreign currencies are exposed to exchange rate
fluctuations; while value of bonds/government securities owned by
investors depend on prevailing interest rates. Organizations with huge
exposures, either have a dedicated treasury department, or outsource
market risk management toModeling market risk requires forecasting
the changes in the economic factors and assesses their impact on the
asset value. Almost popular measure for expressing market risk is
Value-at-Risk, which is ‘the maximum loss’ from an unfavourable event,
within a given level of confidence, for a given holding period. Various
financial instruments like options, futures, forwards, swaps, etc. can be
used effectively to hedge the market risk. Availability of huge data on
various markets has facilitated the development of many sophisticated
models.
These risks can be broken into following components:
(a) Directional Risk – deviations due to adverse movement in the
direction of the underlying reference asset.
(b) Curve Risk – deviation due to adverse change in the maturity
structure of a reference asset.
(c) Volatility risk – unexpected volatility of financial variable.
(d) Time decay risk – risk due to passage of time.
(e) Spread risk – adverse change in two reference assets that are
unrelated.
(f) Basis risk – adverse change in two reference assets that are
related
(g) Correlation risk – risk due to adverse correlations.
6. Operational Risk
The risk that people, processes, or systems will fail or that an external
event will negatively affect the company. Practically speaking, all
organizations face operational risk. For a financial institution/bank,
operational risk can be defined as the possibility of loss due to mistakes
made in carrying out transactions such as settlement failures, failures to
meet regulatory requirements, and untimely collections.
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16.9 COMPULSION VS. VOLUNTARISM
16.9.1 Compulsion
Compulsory insurance is any type of insurance an individual or business
is legally required to buy. Compulsory insurance is mandatory for
individuals and businesses that want to engage in certain financially
risky activities, such as operating an automobile or operating a business
with employees. Compulsory insurance is supposed to protect accident
victims against the costs of recovering from an accident that someone
else, such as another driver or an employer, has caused.
16.9.2 Voluntourism
Voluntourism is a new way of traveling that is becoming increasing
popular around the world. Voluntourism is when people volunteer
overseas while they travel. It is similar to “eco-tourism” in a way,
because the objective of improving lives is still present. But unlike eco-
tourism, voluntourism is aimed at helping other people rather than
helping the environment. Voluntourism involves tourists going on
vacation or rather, missions to help out on a particular project.
This volunteer work overseas entails not only the duties a volunteer will
do, but it is also gives a chance for tourists to discover new places,
experience a foreign culture, and learn more about people in other
countries. The time spent becomes an exciting and fulfilling vacation
because you get to immerse yourself in another world while helping out
those in need.
16.9.3 Deductibles in Car Insurance
Deductible is part of the claim and is to be paid by the policyholder
before the insurance company takes the responsibility of the remaining
claim.
Types of Deductibles
a) Compulsory Deductible in Car Insurance
The compulsory deductible amount is fixed by the insurer and has to be
paid compulsorily by the policyholder whenever any claim arises. As per
IRDA, the amount of Compulsory Deductible for four-wheelers of less
than and equal to 1500cc is Rs.1000 and of Greater than 1500cc is
Rs.2000. The insurer may charge a higher deductible if the car is older
and presents a larger risk of claim or for cars with higher cubic
capacities or in other circumstances where the risk of claim is perceived
to be higher.
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There is no lowering of premium for compulsory deductibles and
premium is calculated taking into consideration other factors such as
IDV, make and model.
b) Voluntary Deductible in Car Insurance
This is the limit chosen by the policyholder to meet a part of the claim
from his own pocket before raising it to the insurer. The amount depends
on the policyholder who chooses the limit factoring in his affordability
and risk. Choosing a higher amount of Voluntary Deductible causes a
lowering in premiums through discounts.
16.9.4 Difference between Compulsory Deductible and Voluntary
Deductible
The compulsory excess is a fixed amount that you must pay towards the
cost of a car insurance claim. A voluntary excess, on the hand, is an
amount you agree to pay on top of this to reduce the overall cost of your
insurance. The principle or system of doing something by or relying on
voluntary action or volunteers.
Compulsory Deductible Voluntary Deductible

It is compulsorily fixed by the This is chosen by the policyholder
insurers and is not mandatory
The level of compulsory Higher the level of Voluntary
deductible has no effect on the Deductible, lower is the premium
premium rate rate
In case of claim, only the In case of claim, the policyholder
compulsory deductible level has to pay both the compulsory
needs to be paid which is low deductible part and the voluntary
deductible chosen, the total of
which is higher
16.10 ETHICAL BEHAVIOUR

Ethical behaviour is characterized by honesty, fairness and equity in
interpersonal, professional and academic relationships and in research
and scholarly activities. Ethical behaviour respects the dignity, diversity
and rights of individuals and groups of people.
Ethics may be defined as a system of moral principles or values. What is
not so easily discerned is the correct ethical approach to a particular
situation. The foundation of ethics arose from the traditions of good
behavior that people expect themselves and others to practice. Many of
these ethical practices have become law. Ethics is a set of instructions
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for a way of life. Ethics is also good business and in the insurance
business it is a matter of utmost good faith.
Some people feel the moral and ethical fiber of our society is
deteriorating rapidly. Others see both positive signs and disturbing signs,
but feel optimistic. While there is room for a difference of opinion on this
issue, most people agree on the importance of maintaining a high ethical
standard in a society that is to survive and prosper.
Some would argue that it is even more important to maintain a high
ethical standard in the insurance industry. What is there about the
insurance transaction that makes a high ethical standard so important?
Some of the unique aspects of the insurance industry combine to create
this necessity.
Insurance is an Essential Product
In our society, both individuals and businesses depend on the insurance
product to provide essential services and protect them from financial
disaster:
• Health insurance provides access to quality medical care.
• Life insurance proceeds support families, educate children, and
assist in the perpetuation of a business.
• Property coverage is an integral part of every mortgage contract.
• Some casualty contracts (automobile and workers’
compensation, for example) are required by law.
In modern society, insurance has become a necessity.
16.10.1 Ethics in the Insurance Industry
Much is made of the poor image of the insurance industry. Consumers
normally do not think of insurance in a positive light. In his analysis of
the insurance industry, Lawrence G. Brandon, CPCU, identified five
weaknesses of the industry that lead to such a poor reputation.
• Lack of leadership allows insurance organizations to be driven by
stockholder expectations rather than long-term goals.
• Poor communication about how the industry and its products are
designed to work leads to misunderstandings.
• Lack of customer focus often leads to an adversarial position at a
time the customer needs the product the most.
• Burdensome bureaucracies create a negative image.
• Unhealthy competition destroys the pricing integrity of the
insurance product
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Below are mentioned some of the challenging issues found in
Insurance sector:
a) Premium Collection issues
This is another challenge identified to be affecting this business in
India. These intermediaries are the distributing channels that stand
between the insured and insurers. It has been reported that
insurance brokers and agents are fund of collecting premium from
insured and not remitting to insurance companies. These people use
premium for other things and quickly run to remit when claim occur.
b) Problem of solvency
Cash flow problem is a confrontation to insurance business in India.
It can be said that these sectors live from hand to mouth. Based on
this investor are chased away from this market as no one is ready to
embark on an investment that will not be viable.
c) Lack of Standards
It has been observed that there is lack of standard for this business
in India, despite the fact that there are recognized regulating bodies.
Every player in this market acts the way they like. d) Attitude of
Government: The failure of government to inject fund into this
business has made it impossible for them to attract investors as they
cannot pay dividend not to talk of declaring bonus to shareholders.
e) Poor Management
A sizeable number of practitioners managing insurance business are
not competent enough to manage this business. And this has really
done a great harm to the business as insurance business itself.
f) Lack of Integrity and Trust
Successful insurance companies evolve around trust which is
absent. The major if not the only reason of insured taking up an
insurance policy is to have their claims settled in case of mishap. The
image of insurance company can simply be determined by their
ability and attitudes to claims settlement.
Unethical Insurance Practices
• Delaying payment unreasonably
• Denying a policyholder's claim despite overwhelming evidence to
support it
• Making a partial payment and seeking a settlement for the
remainder
• Not investigating a claim or, in some cases, denying the claim
without providing any reason
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• Unreasonably making demands for documents, interviews, and
other information in a bid to delay or deny making payments.
16.10.2 Common Unethical Insurance Practices
• Failure to communicate
An insurance company may fail to notify you when it makes a
decision regarding your insurance, or the company may fail to return
your calls or emails after an accident.
• Delaying settlement
Similarly, an insurance provider may delay your claim for settlement
without a justifiable cause. Often, providers hope they can delay the
settlement until you either forget or give up on your personal injury
case.
• Unreasonable demands
In connection with delaying settlement, an insurance company may
make unreasonable demands meant to stall the settlement process,
such as asking you for an unreasonable number of documents and
claiming the process cannot begin until the company receives all
these documents. If you fail to meet these demands, the insurance
company may deny your claim.
• Changing or cancelling the insurance policy
An insurance company may make sudden changes to its policy in
response to a claim you filed, making it impossible for your claim to
go through. Often, companies will cite the new policy as a reason to
deny your claim. In other cases, a company may cancel the policy
altogether after you try to file a claim.
• Unethical investigating
In investigating your claim, the insurance company may use
unethical or even illegal methods. Sometimes the company may fail
to properly investigate your claim, or simply refuse to investigate at
all and tell you your claim is denied.
• Withholding policy information
Your insurance company should disclose the entire policy to you,
including any policy limits. Withholding information or refusing to
inform clients of policy limits constitutes an unethical insurance
practice.
• Conflict of interest
When an insurance adjustor tries to handle both your claim and the
claim from the other party, a conflict of interest necessarily arises.
This conflict of interest may lead to the insurance company receiving
money from the other party in exchange for helping them, which
means the company will short-change you in favor of the other party.
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• Unreasonably low settlements
If an insurance company offers you a settlement that seems
unreasonably low, you may be a victim of an unethical insurance
practice. In this case, you should wait to accept the offer until you
have consulted an attorney.
• Threats
An insurance company may refuse to pay unless the client does
something or doesn’t do something. This constitutes a threat, and is
unethical.
• Restrictive definitions
In some cases, an insurance company may fail to pay the client
because the situation does not meet the company’s set of criteria.
For example, an insurance company may refuse to pay a client who
has had a heart attack if the client’s medical condition does not meet
the definition of a heart attack as laid out in the insurance company’s
policy.
• Overcharging
Watch for agency fees or extra expenses that come in addition to
the initial payment demanded by an insurance company, or
expenses that are not specified in the quote given by the insurance
company.
• Recognizing unethical insurance practices
To be on the safe side, always demand a written quote from your
insurance company for any transactions. This quote should include
the name and contact information of the insurance company and
agent or agency. If your insurance policy changes, you should
receive an endorsement summary outlining the new policy. Likewise,
after paying for a home or auto policy, you should receive a written
declaration page and an ID card for your car insurance policy. Don’t
pay for any additional fees that aren’t spelled out in the insurance
quote, and don’t use a service (such as roofing, auto repair, etc.)
you feel your insurance provider is pressuring you into using.
LET US SUM UP
In return for a specified payment (premium), the insurer undertakes to

pay the insured or a beneficiary a specified amount of money in the
event that the insured suffers loss through the occurrence of an event
covered by the insurance contract (policy).The central ethical issue in
the insurance industry centers around money over customer support.
Several facets differentiate those who see insurance as a vocation and
those who view the profession as a means to a financial end.
253
CHECK YOUR PROGRESS
1. Which of the following is not public sector insurance company
a) United India Insurance company
b) New India assurance company ltd
c) SBI Insurance life Insurance
d) General Insurance corporation of India
2._____ Act has Intermediaries between the Insurance provider and the
Insured Person
a) Under writer
b) Business Agent
c) Insurance Agent
d) Broker
3. Which of following type of company/organisation Issues ULTP
a) Insurance company
b) Bank
c) NABARD
d) RBI
4. Which of the following is the only Public sector Company in the field of
Insurance?
a) General Insurance company
b) .New India corporation
c) Oriental Insurance company
d) .LIC
GLOSSARY
Individual : It is a health policy that the policyholder can

Insurance purchase. Individual policies are also called
personal health plans. The person one who
buys policies for his/her personal use is said to
be as Individual Insurance Customers.
Financial risk : It includes those risks whose outcomes can be

measured in monetary terms
Ethical behaviour : Respects the dignity, diversity and rights of

individuals and groups of people
254
Compulsory : It is any type of insurance an individual or
insurance business is legally required to buy.
SUGGESTED READING

Limited
Limited
WEB RESOURCES
1. LIC Agent Business Basic Ethics and Tips Tamil - YouTube
2. Codes of Ethics||GE6075-Professional Ethics in Engineering||
Unit 3(in Tamil) - YouTube
3. Convincing Customer to Buy Insurance (Tamil) - Bing video
1. c) 2.c) 3.a) 4.d)
255
UNIT 17
RISK MANAGEMENT-
INSURANCE
STRUCTURE
Overview
Learning Objectives
17.1 Risk Management
17.2 Risk Management Process
17.3 Methods of Handling Risks / Risk Management Techniques
17.4 Benefits of Managing Risk
17.5 Factors Influencing Policyholder Satisfaction
17.6 Customer Retention in the Insurance Industry

Let Us Sum Up
Check Your Progress
Glossary
Suggested Reading
OVERVIEW
Risk is a part and parcel of our daily lives. From the moment we get up
in the morning, drive or go to work until we get back into our beds (and
perhaps even afterwards), we are exposed to risk. There are two
ingredients that are needed for risk to exist. The first one is uncertainty
about the potential outcomes from an experiment and the other is that
the outcomes have to matter in terms of providing utility. He notes, for
instance, that a person jumping out of an airplane without a parachute
faces no risk since he is certain to die (no uncertainty). Uncertainty leads
to insecurity which ultimately leads to worries among people. A sense of
security may be the next basic goal after food, clothing, and shelter and
one of the solutions to attain the same is insurance.
LEARNING OBJECTIVES
• discuss the basic concept of risk management

• describe the process of risk management and its techniques.
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• point out the benefits in managing risks
• assess the factors which are determining policyholders’
satisfaction level
• narrate the customer retention in the insurance sectors
17.1 RISK MANAGEMENT

Meaning of Risk
Risk has been defined as the possibility of occurrence of an

unfavourable deviation from the expected i.e. what you want to happen
does not happen or vice versa what you do not want to happen,
happens. When such unexpected events occur there is a sense of loss,
which may or may not be measurable in terms of money. For example:
When your vehicle gets stolen there is a monitory loss but if your pet
dies unexpectedly, you feel a great loss but this loss is not measurable
in terms of money. Since an unfavourable deviation from the expected
always results in loss, we can also define risk as the possibility of
occurrence of loss.
Meaning of Risk Management
Risk management is a process of thinking systematically about all
possible risks, problems or disasters before they happen and setting up
procedures that will avoid the risk, or minimize its impact, or cope with its
impact. It is basically setting up a process where you can identify the risk
and set up a strategy to control or deal with it.
Although the term risk management is a recent phenomenon, the actual
practice of risk management is as old as civilization itself. In the broad
sense of the term, risk management is the process of protecting one’s
person and assets. In the narrower sense, it is a managerial function of
business that uses a scientific approach to dealing with risks
There are five commonly accepted strategies for addressing risk. The
process begins with an initial consideration of risk avoidance then
proceeds to three additional avenues of addressing risk (transfer,
spreading and reduction). Ideally, these three avenues are employed in
concert with one another as part of a comprehensive strategy. Some
residual risk may remain.
17.2 RISK MANAGEMENT PROCESS

Introduction
There is no escape from the presence of risk, and humanity must
accordingly seek ways of dealing with it. Some risks are met through the
collective efforts of society and government. Municipal police and fire
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departments are good examples of the collectively financed approaches
to dealing with risk. Although society and government can help alleviate
the burden of risks in many areas, some risks are considered the
responsibility of the individual. Given the vast array of risks faced by
individuals and businesses and the variety of possible ways to deal with
them, a systematic approach is needed in dealing with risks.
Risk Management Process
The risk management process can be divided into a series of individual
steps that must be accomplished in managing risks. Although it is useful
for the purpose of analysis to discuss each of these steps separately, it
should be understood that in actual practice the steps tend to merge with
one another.
Risk Management is a five-step process:
Step 1 – Establish the context
Step 2 – Identify the risks
Step 3 – Evaluate the risks

Step 4 – Treat the risks
Step 5 – Monitor and Review
1. Establish the context

Before risk can be clearly understood and dealt with, it is important to
understand the context in which it exists. Here the insurer should define
the relationship between the insurer’s organization and the environment
that it operates in so that the boundaries for dealing with risk are clear.
Establish the content by considering:
• The strategic context – the environment within which the
organisation operates
• The organisational context – the objectives, core activities and
operation’s of the organisation.
2. Identification of Risks:
The second step in the process of managing risks is identifying
prospective risks. An insurer should have effective means of obtaining
important information to identify and measure its exposure to risks
inherent in its core activities namely product development, pricing,
underwriting, claims handling.
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Risk in product development:
Risk in pricing: An insurer should identify the possibilities which may
lead to its revenue from premiums and investment income being
insufficient to meet the payment of anticipated expenses.
Risk in underwriting: An insurer should consider the implications
associated with accepting risks which may deviate from the risks
identified during the product development and pricing stages
3. Risk Evaluation
Evaluation of risk involves comparing the level of risk found during the
analysis process with insurer’s previously established risk criteria and
deciding which risk factors will have the greatest effect so require priority
with regard to how they will be managed.
4. Risk Treatment (Risk Control and Mitigation)
The insurer should implement necessary measures to control and
mitigate the identified risks. Risk treatment involves identifying the range
of options for treating the risk, evaluating those options, preparing the
risk treatment plans and implementing those plans. It is about
considering the options for treatment and selecting the most appropriate
method to achieve the desired outcome.
5. Risk Monitoring and Review
Monitoring and review is an ongoing part of risk management that is
integral to every step of the process. Monitoring and review ensure that
the important information generated by the risk management process is
captured, used and maintained.
17.3 METHODS OF HANDLING RISKS / RISK MANAGEMENT
TECHNIQUES
Some of the methods used to handle risks are Risk Avoidance, Loss
Prevention and Reduction, Risk Retention and Risk Transfer. For
convenience’s sake these are briefly being dealt with separately but in
practice two or more are used in combination.
Risk management is a process of thinking systematically about all
possible risks, problems or disasters before they happen and setting up
procedures that will avoid the risk, or minimize its impact, or cope with its
impact. It is basically setting up a process where you can identify the risk
and set up a strategy to control or deal with it.
Although the term risk management is a recent phenomenon, the actual
practice of risk management is as old as civilization itself. In the broad
259
sense of the term, risk management is the process of protecting one’s
person and assets. In the narrower sense, it is a managerial function of
business that uses a scientific approach to dealing with risks
There are basically five risk management techniques
1. Risk Avoidance
2. Risk Reduction
3. Risk Sharing
4. Risk Retention
5. Risk Transfer
1. Risk Avoidance (Elimination of Risk)
The simplest way to deal with risk is to avoid it together. Here, it is
important to note that all the activities in life involve some risk. Those
who minimize risk by avoiding the same, they avoid many pleasures of
life and potential profits that result from taking risk only so, are not able
to make much money. Although it is the simplest way, but it is not
practicable.
Risk avoidance is the elimination of hazards, activities and exposures
that can negatively affect an organization's assets. This includes not
performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the legal liability
that comes with it. Another would be not flying in order not to take the
risk that the airplane was to be hijacked. Avoidance may seem the
answer to all risks, but avoiding risks also means losing out on the
potential gain that accepting (retaining) the risk may have allowed. Not
entering a business to avoid the risk of loss also avoids the possibility of
earning profits. Increasing risk regulation in hospitals has led to
avoidance of treating higher risk conditions, in favor of patients
presenting with lower risk.
Risk avoidance is the elimination of risk. You can avoid the risk of a
loss in the stock market by not buying or shorting stocks;, or the risk of
divorce, by not marrying; the risk of having car trouble, by not having a
car. Many manufacturers avoid legal risk by not manufacturing particular
products.
Of course, not all risks can be avoided. Notable in this category is the
risk of death. But even where it can be avoided, it is often not desirable.
By avoiding risk, you may be avoiding many pleasures of life, or the
potential profits that result from taking risks. A business cannot operate
without taking some risk. Virtually any activity involves some risk.
260
Generally, risk should be avoided when losses are large and gains are
small. Prevention is better than cure.
The following steps are taken in preventing the risks:
1. If the creditworthiness of the party is known before gaining credit,
losses from bad debts can be prevented.
2. Loss from fire, Weather change etc. can be avoided by
constructed fireproof buildings for storing products.
3. Losses from theft can be minimized by giving training to
employees or burglar alarms, safety vaults etc. can help a lot in
preventing risk.
2. Risk Mitigation/Reduction
We usually cannot avoid risk, so we often attempt to mitigate risk.
Mitigating risk means that you are reducing risks by implementing
controls, other countermeasures that have a direct effect on the risks
identified.
Risk reduction or "optimization" involves reducing the severity of the loss

or the likelihood of the loss from occurring. For example, sprinklers are
designed to put out a fire to reduce the risk of loss by fire.
This is the idea of reducing the extent or possibility of a loss. This can be
done by increasing precautions or limiting the amount of risky activity.
For example, installing a security alarm, smoke detectors, wearing a
seat belt or wearing a helmet are ways of employing risk reduction.
Outsourcing could be an example of risk reduction if the outsourcer can
demonstrate higher capability at managing or reducing risks. For
example, a company may outsource only its software development, the
manufacturing of hard goods, or customer support needs to another
company, while handling the business management itself. This way, the
company can concentrate more on business development without
having to worry as much about the manufacturing process, managing
the development team, or finding a physical location for a call center.
We usually cannot avoid risk so we often attempt to mitigate risk.

Mitigating risk means that you are reducing risks by implementing
controls, other countermeasures that have a direct effect on the risks
identified.
3. Risk Sharing
Risk sharing. Also known as "risk distribution," risk sharing means that
the premiums and losses of each member of a group of policyholders
are allocated within the group based on a predetermined formula. Briefly
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defined as "sharing with another party the burden of loss or the benefit of
gain, from a risk, and the measures to reduce a risk."
The term of 'risk transfer' is often used in place of risk sharing in the
mistaken belief that you can transfer a risk to a third party through
insurance or outsourcing. In practice if the insurance company or
contractor go bankrupt or end up in court, the original risk is likely to still
revert to the first party Risk sharing is a risk response technique for
positive risks or opportunities that involves assigning partial or complete
ownership of the risk to a third party who is in a better position to make
sure the opportunity is realized. Example of risk sharing include
1. Joint ventures with strategic partners who have the relevant
technical expertise.
2. Entering into reinsurance business with other companies and
also accepting reinsurances from other companies.
4. Risk Retention
Risk retention means handling the unavoidable risks internally. It is a

planned assumption of risk through the use of deductibles, co-payments
or self-insurance It is a very cost-effective method of handling risk. Risk
retention can be active or passive.
Risk retention simply involves accepting the risk. Even if the risk is
mitigated, if it is not avoided or transferred, it is retained. Retention is
effective for small risks that do not pose any significant financial threat.
The financial status of the family or individual will determine the
acceptability of a risk. A couple of examples of risk retention: A
billionaire may not have to worry about insuring his car. An individual
may not be able to afford or obtain health insurance. Both individuals are
retaining risk, one is because they’re able to, the other is because they
have to.
The main purpose of retention is to:
1. To cut down the expenses and improve the cash inflows.
2. To fund for losses that cannot be insured.

3. To increase control of claim reserving and claim settlements.
a) Active Risk Retention
It means that an individual is consciously aware of the risk and
deliberately plans to retain all or part of it. Active risk retention is used for
two major reasons. First, it can save money. Second, the risk may be
deliberately retained if commercial insurance is either unavailable or
unaffordable.
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b) Passive Risk retention
Risk can also be retained passively. Certain risks may be unknowingly
retained because of ignorance, indifference or laziness. Passive
Retention is very dangerous if the risk retained has the potential for huge
financial loss.
In case of active retention the person is aware of the risk and
deliberately plans to retain all or part of it. But in case of passive
retention the persons unknowingly retained risks because of ignorance,
laziness etc. For instance, smoking cigarettes can be considered a form
of passive risk retention, since many people smoke without knowing the
many risks of disease, and, of the risks they do know, they don't think it
will happen to them.
5. Risk Transfer
Risk transfer is a risk management and control strategy that involves the
contractual shifting of a pure risk from one party to another. A risk
management technique whereby one party (transferor) pays another
(transferee) to assume a risk that the transferor desires to escape. One
example is the purchase of an insurance policy, by which a specified risk
of loss is passed from the policyholder to the insurer.
Transfer of risk is the underlying tenet behind insurance transactions.
The purpose of this action is to take a specific risk, which is detailed in
the insurance contract, and pass it from one party who does not wish to
have this risk, the insured, to a party who is willing to take on the risk for
a fee, or premium, the insurer. For example, whenever a person
purchases home insurance, he is essentially paying an insurance
company to take the risk involved with owning a home. Weather, political
unrest, and labor strikes are examples of events that can impact the
project and that are outside the control of the project team.
Risks can be transferred by several methods, including:
1. Transfer of risk by contracts
2. Incorporation of a business firm
3. Hedging price risks
The most effective way of handling risk is to transfer it so that the loss is
borne by another party. The most common method of transfer of risk is
insurance in which the insured transfers to the insurer the risk against a
loss or damage suffered by it on account of an uncertain future, in return
for a consideration called 'premium'. Other methods of transfer of risk
are:
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a. Hedging
It is a method of risk transfer accomplished by buying and selling for
future delivery. It is a form of forward trading to minimize losses due
to changes in prices. Under it, the possibility of loss which occurs
because of price fluctuations is shifted during the time gap between
purchase and sale of a commodity. It involves entering
simultaneously into two contracts of an opposite though
corresponding nature, one in the spot or cash market and the other
in the future market. The purpose of hedging is to protect the trade
profit from adverse fluctuations in commodity prices.
b. Underwriting
A public company issuing shares and debentures may face the risk
of loss due to the failure to sell the entire issue of securities. Such
risk can be shifted to an underwriter which is the financial
intermediary between the company issuing securities and the
ultimate investors.
c. Subcontracting
Subcontracting is an inter-firm relationship, where a small firm may
produce different components, intermediate inputs and final output
or it may provide various assembling activities, etc for the parent
firm. Such small firms are generally known as the subcontractors.
The need for subcontracting arises when a firm undertakes a
business which extends over a long period of time or which requires
the specialised services of several experts. In such a situation, the
firm may face risks resulting from rise in prices of materials, labour
or other imports. Such risks may be shifted to other firms through
subcontracting. For instance, a building construction firm may
engage subcontractors for timbers, glasses, electric wiring,
plumbing, cement, etc.
17.4 BENEFITS OF MANAGING RISK
Risk management provides a clear approach to identifying risks. Risk
management has the following benefits:
1. More effective utilization of resources
2. Reduced costs by limiting or preventing breakages
3. Enhanced reputation of an organization
4. Attainment of risk management objectives easily.
5. An ability to grasp new opportunities
6. Fewer breakdowns, fewer shocks and fewer unwelcome
surprises
7. Improved strategic and business planning
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An effective risk management practice does not eliminate risks.
However, having an effective and operational risk management practice
shows an insurer that your organization is committed to loss reduction or
prevention. It makes the organization a better risk to insure.
17.5 FACTORS INFLUENCING POLICYHOLDER SATISFACTION
In today's competitive era, satisfied policyholders are the key for the
success of any business. The golden rule of marketing is that "one
satisfied policyholder brings hundred more policyholders"; so this rule is
followed by every business to meet the competition or to survive in the
market. It is true that insurance business cannot survive without
policyholders. Customer satisfaction needs to be analyzed to know the
demand of policyholders from the company in the form of
products/services. A satisfied customer is the backbone for any
insurance companies. For Business progress and expansion to serve
costumer is not the only objective but keep them satisfied is the most
important objective. Satisfied customers are the main assets for any
organizations in their long term future progress.
Customer satisfaction is one of the important tools for the every
insurance company and it focuses on analyzing the awareness and
satisfaction level of the customers towards their investment of money in
risk free avenues. Therefore it is important to seek out the factors that
influence customer satisfaction which will contribute to the development
of our economy. Besides that, it is essential to identify the reason that
restrains one from becoming customers of life insurance. It is a rare
perspective compare to researches conducted based on factors like
policies, price and promotion and this will help in enhancing the life
insurance corporation for providing good policies to their customer
according to their requirement.
Customers evaluate services quality from five various dimensions, that
is, assurance, empathy, reliability, responsiveness and tangibility. There
are various reasons which show why organizations should look for
presenting higher-quality services to their customers some of which are:
increasing customers ‘expectations; competitors‘ activities;
environmental factors; easy access to the internet; the concept of
services; and the difficulty of its understanding by the customers.
Now let’s have a look at what are the factors affecting policyholder
satisfaction. Here are 12 key factors.
1. Accessibility
2. Empathy
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3. Response Time
4. Personalization
5. Convenience
6. Value
7. Simplicity
8. Quality
9. Reasonable Prices
10. Appreciation
11. Loyalty Programs
12. Community
17.6 CUSTOMER RETENTION IN THE INSURANCE INDUSTRY
Defining Customer Retention
• The rate of customer retention is a measure of how many customers

a particular insurance agent maintains from one renewal period to
the next. You calculate your customer retention rate as follows:
• Take your total number of customers at the end of a period and

subtract the new customers you acquired.
• Take the number from step one and divide it by your total customer
base at the start of the period.
• Multiply the final number by 100.
you have 100 customers at the end of a policy year, and you acquired
10 along the way, giving you 90 pre-existing customers. Now, at the start
of the period, you have 110. Take the 90 and divide it by 110, then
multiply by 100. This equation would reveal you have an 81.8%
customer retention ratio.
Below are some of the strategies and steps insurers can follow to retain
their customers. Retaining a policyholder for a longer duration helps to
capture greater value for the insurer.
1. Adding value during an active policy period
Insurance companies need to augment their business and act as a
service partner in the customer's life. Instead of being present only when
an accident has happened, they can be their partners and support their
customers in pro-active maintenance of the items they are insuring. For
example, an auto insurance company may take care of reminding a
266
vehicle’s regular maintenance and provide that as an offering among its
network of service providers. Such an offering would not only reduce the
chances of a future accident but also would improve customer
satisfaction as well.
2. Ease of doing business
Insurance companies need to support their policyholders from a
regulation standpoint. Be it handling communication with the mortgagee,
deducting the premium via automated payment plans, or making the
various documents available in the insurer’s mobile app, insurers need
to be omnipresent and support their customer through various channels.
Procedural needs from policyholders should not create a negative
stimulus, forcing them to shop around. The use of state-of-the-art
software systems does go a long way in this context.
3. Better processing of claims
In the event that a loss resulting in a claim does happen, processing the
claim needs to be fast and accurate. An insurance company will have
processes and procedures in place to handle the claim, but they also
may need to support their customers mentally during these times.
Combining automation to handle the processes and procedures with
manual interaction to relieve policyholder stress will result in a favorable
outcome in the mind of a claimant and continue to serve as a testimony
for repeat business.
4. Increase the perceived value of the product
Insurance is a business (perhaps the only one) where neither the
consumer nor the company wants the transaction– an actual loss, to
happen. Insurers can differentiate themselves at times of loss, and if
there is no such event, it becomes very difficult for an organization to
deliver its value. In the event, Insurer had not got an opportunity to
deliver value to its customers, they can work around that by increasing
the perceived value of their product with time. Some of the tactics here
could be adding additional coverages based on the need of the
policyholder (e.g., adding additional identity theft coverage at renewal) or
issuing smart devices to measure usage This may help the insured in
increased savings and help pre-empt a loss by providing a warning of,
say, a water leak in the house
Gaining policyholder trust is more important now than ever. There are
various ways that you can obtain policyholder trust, including:
• Providing excellent customer service.
267
• Understanding policyholder’s concerns and effectively
responding to and resolving them.
• Sharing testimonials on social media or your website.
• Being transparent about claims and other information that directly
affects your policyholder.
LET US SUM UP
Risk is the possibility of an unfavorable deviation from expectation i.e.
uncertainty. Uncertainty Leads to insecurity which ultimately leads to
worries among people. Insurance is the most effective these worries of
people. Pure risk is a risk in which there is only a possibility of loss and
there is no possibility of gain. When there is the possibility of profit or
loss, it is called speculative risk. There can be two sources of risks i.e.
perils and hazards. Perils cause deviations from expectations and
hazards increase the likelihood of such occurrences. A comparison is
made between the levels of risk found during the analysis process with
insurer’s previously established risk criteria priorities are set with regard
to how the risks will be managed.
CHECK YOUR PROGRESS

1. Risk management is one of the most important jobs for a
a) Client b) Investor
c) Production team d) Project manager
2. Which of the following risk is the failure of a purchased component to
perform as expected?
a) Product risk b) Project risk
c) Business risk d) Programming risk
3. What assess the risk and your plans for risk mitigation and revise
these when you learn more about the risk?
a) Risk monitoring b) Risk planning
c) Risk analysis d) Risk identification
4. Risk management is now recognized as one of the most important
project management tasks.
a) True b) False
5. Which of the following risks are derived from the organizational
environment where the software is being developed?
a) People risks
b) Technology risks
268
c) Estimation risks
d) Organizational risks
GLOSSARY
Risk : Risk has been defined as the possibility of

occurrence of an unfavourable deviation from the
expected i.e. what you want to happen does not
happen or vice versa what you do not want to
happen, happens.
Risk : Risk management is a process of thinking

management systematically about all possible risks, problems
or disasters before they happen and setting up
procedures that will avoid the risk, or minimize its
impact, or cope with its impact.
Risk retention : Risk retention means handling the unavoidable

risks internally. It is a planned assumption of risk
through the use of deductibles, co-payments or
self-insurance
Underwriting : A public company issuing shares and debentures

may face the risk of loss due to the failure to sell
the entire issue of securities
Hedging: It is a method of risk transfer
accomplished by buying and selling for future
delivery. It is a form of forward trading to
minimize losses due to changes in prices.
WEB RESOURCES
1. Insurance and Risk Management Basics for Neighborhood
Associations and HOAs - Bing video
video
3. RISK MANAGEMENT IN TAMIL| HOW TO FOLLOW THE RISK
MANAGEMENT IN THE TRADING - YouTube
ANSWER FOR YOUR PROGRESS
1.d) 2.a) 3.a) 4.a) 5.d)
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Master of Commerce
SECOND YEAR
(Semester - 03)
MCOS -34
ADVANCED CORPORATE ACCOUNTING

www.tnou.ac.in
SYLLABUS
Course Title : ADVANCED CORPORATE ACCOUNTING

Course Credit :4
CO1. Impart knowledge on the basic concepts of corporate accounting
especially consolidation of companies.
CO2. Gain ability to solve problems relating to holding company accounts,
liquidation of companies and various other accounts
CO3. Get an idea about accounts of banking and insurance companies and
it’s the procedures of accounting.
CO4. Give a comprehensive view of double accounting system to develop
skills in the preparation of these accounting statements
CO5. Acquaint the learners regarding the various types of corporate
accounting as per the national and international accounting standards
COURSE SYLLABUS
BLOCK I: Advanced Company Accounts

Amalgamation Accounts - Absorption Accounts - External reconstruction and
internal reconstruction - Preparation of Scheme of internal reconstruction-
share buy-back-Accounting entries for Buy-back of shares
BLOCK II: Holding and Liquidation Accounts

Holding Companies’ Accounts: Introduction-Advantages-Disadvantages-
Wholly –owned Subsidiary Companies-Partly –owned Subsidiary Companies
- Principles of Consolidation-Elimination of Investment in Shares-Minority
Interest-Cost of Control-Capital and Revenue Profit-Revaluation of Assets
and Liabilities- Contingency Liabilities-Unrealized Profit-Current Accounts-
Bonus Shares-Treatment of Dividend- Debentures, Preference Shares -
Sales of Shares-Consolidated Profit and Loss Account (Except inter-
company holdings and chain holding) - Liquidation of Company: Preparation
of Statements of affairs including deficiency/surplus account
BLOCK III: Accounts of Banking and Insurance Companies

Accounts of Banking Companies: Introduction-Legal provisions-Disposal of
Non-Banking Assets-Restrictions on Loans, Commission and Payment of
Dividend- Management of Minimum Capital-Statutory Reserve-CRR and
SLR-Accounts and Audit-Profit and Loss Account-Balance Sheet - Money at
Call and Short Notice – Advances- Acceptance Endorsements etc., - Bills for
a
Collection-Bills Payable-Bills Purchased and Discounted-Rebate on Bills
Discounted-Inter Office Adjustments-Slip System -Accounts of Insurance
Companies: Types of Insurance-Annual Accounts-Life Insurance-
Consideration for Annuities Granted - Balance Sheet - Determination of
Profit-Accounts of General Insurance-Reserve for Unexpired Risk -
Preparation of Final Accounts
BLOCK IV: Double Accounting System

Double Accounting System: Introduction- types -Advantages and
Disadvantages - Accounts of Electricity Companies-Depreciation-
Contingencies, Development, General, Tariff and Dividend Control Reserve
-Remuneration – Reasonable Return-Capital Base-Clear Profit-Disposal of
Surplus-Replacement of Assets-Receipts and Expenditure on Capital
Accounts – General Balance Sheet - Revenue Account – Net Revenue
Account - Accounts of Electricity Companies and Railways - Replacement
and Renewal
BLOCK V: Recent trends In Accounting

Accounting Standards – Indian and International Accounting Standards –
Inflation Accounting - Human Resource Accounting - Social Accounting –
Value added statement - Economic Value-added statement - Brand valuation
and accounting - Accounting in computerized environment (Theory only)
REFERENCES
1. Arulanandam, M.A. and Raman, K.S (2009), Advanced Accounting,
Himalaya Publishing House, Mumbai
2. Gupta R.L. and Radhaswamy, (2009), Advanced Accountancy, Sultan
Chand & Sons, New Delhi
3. Jain, S.P. and Narang, K.L, (2014), Advanced Accountancy, Kalyani
Publishers, Ludhiana
4. Pillai R.S.N, Bagavathi and Uma. S (2010), Fundamentals of Advanced
Accounting, S.Chand & Company Private Limited, New Delhi.
5. Rajasekaran, Vand Lalitha, R. (2011), Advanced Accounts, Pearson.
New Delhi
6. Reddy, T.S. and Murthy, A (2015), Corporate Accounting, Margham
Publications, Chennai
WEB RESOURCES
1. Company Accounting Course Material | Download book
(freebookcentre.net)
2. Corporate Accounting Study Materials - CORPORATE ACCOUNTING
Prepared by Dr. N. Saravanan Assistant - StuDocu
3. advanced corporate accounting - Bing video
b
CLO1. Calculate the corporate accounting especially consolidation of
companies which includes amalgamation, absorption, internal and
external reconstructions.
CLO2. Prepare the accounts of Holding and liquidation of companies and its
proceedings
CLO3. Clarity about the accounts of Banking Companies and the Insurance
Company accounts and its financial statements
CLO4. Present the annual final accounts/annual financial statements of
public utility undertaking which are undertakings are usually
incorporated under Special Acts.
CLO5. Describe the concept and component of Indian and International
Accounting Standard, procedure for other accounting like Inflation
Accounting, Human Resource Accounting and Social Accounting
c
BLOCK CONTENTS PAGE
/UNIT NO.
BLOCK 1 INTRODUCTION TO ADVANCED
CORPORATE ACCOUNTING
UNIT 1 ADVANCED COMPANY ACCOUNTS - 2
AMALGAMATION OF COMPANIES
1.1 Introduction 3
1.2 Definitions 3
1.3 Types of Amalgamation 4
1.4 Purchase Consideration 5
1.5 Methods of Calculating Purchase Consideration 5
1.6 Accounting Treatment 6
UNIT 2 ABSORPTION AND EXTERNAL 18
RECONSTRUCTION
2.1 Introduction 19
2.2 Meaning of Absorption and External 19
Reconstruction
2.3 Solved Problems 20
2.4 Inter Company Owings 29
2.5 Inter Company Holdings 32
UNIT 3 INTERNAL RECONSTRUCTION 45
3.1 Introduction 46
3.2 Methods of Reconstruction 46
3.3 Alteration of Share Capital 46
3.4 Reduction of Share Capital 48
UNIT 4 59
BUY BACK OF SHARES
4.1 Buy back of shares – Meaning 60

4.2 Reasons for Buy- back of shares 60
4.3 Conditions of buy back 60
4.4 Accounting requirements of buy back 61
4.5 Accounting entries in buy back of shares 62
d
4.6 Advantages of buy back of shares 64
BLOCK 2 HOLDING AND LIQUIDATION ACCOUNTS
UNIT 5 ACCOUNTS OF HOLDING COMPANIES – 68
INTRODUCTION
5.1 Introduction 69
5.2 Meaning of holding company and subsidiary 69
company
5.3 Legal requirements regarding statement of 70
Accounts
5.4 Wholly owned and partly owned subsidiaries 70
5.5 Advantages of holding companies 70
5.6 Disadvantages of holding companies 71
5.7 Consolidated balance sheet and profit and loss 71
account
UNIT 6 ACCOUNTS OF HOLDING COMPANIES – 74
CONSOLIDATED FINANCIAL STATEMENTS
6.1 Consolidated financial statements – Introduction 75
6.2 Steps for the preparation of consolidated 75
Balance sheet
6.3 Revaluation of Assets and liabilities 82
6.4 Bonus shares 85
6.5 Treatment of Dividend 88
6.6 Sale of shares 89
6.7 Treatment of Debentures 91
6.8 Consolidation of Profit and loss account 91
UNIT 7 LIQUIDATION – STATEMENT OF AFFAIRS 97
AND SURPLUS / DEFICIENCY ACCOUNT
7.1 Introduction 98
7.2 Modes of winding up or liquidation 98
7.3 Contributories 98
7.4 Order of payment 99
7.5 Preferential creditors 99
e
7.6 Interest on Liabilities 100
7.7 Statement of Affairs 100
7.8 Deficiency / Surplus account 102
UNIT 8 LIQUIDATOR’S FINAL STATEMENT OF 110
ACCOUNTS
8.2 Liquidator’s final statement of account 111
8.3 Liquidator’s remuneration 112
8.4 Form of the liquidator’s final statement of 113
accounts
8.5 Solved problems 115
BLOCK 3 ACCOUNTS OF BANKING AND INSURANCE
COMPANIES
UNIT 9 ACCOUNTS OF BANKING COMPANIES 124
9.2 Important provisions 125
9.3 Specimen of Profit and Loss Account of Banking 128
Company
9.4 Specimen of Balance Sheet of Banking 130
Company
9.5 Accounting Treatment of some special items 134
9.6 Management of Minimum Capital 140
9.7 Slip system of posting 142
UNIT 10 ACCOUNTS OF INSURANCE COMPANIES – 158
LIFE INSURANCE COMPANIES
10.2 Meaning of Insurance 159
10.3 Types of Insurance 159
10.4 Accounts of Life Insurance Business 159
10.5 Determination of Profit 183
UNIT 11 ACCOUNTS OF INSURANCE COMPANIES – 191
GENERAL INSURANCE COMPANIES
f
11.2 Types of General Insurance Policies 192
11.3 Accounts of General Insurance Companies 192
11.4 Specimen off General Insurance Revenue 193
Account and Balance Sheet
BLOCK 4 DOUBLE ACCOUNTING SYSTEM
UNIT 12 DOUBLE ACCOUNTING SYSTEM – BASIC 217
CONCEPTS
12.2 Double Account System – Meaning 218
12.3 Special features of Double Accounts System 218
12.4 Differences between Single Account System and 219
Double Account System
12.5 Advantages of Double Account System 12.5
12.6 Disadvantages of Double Account System 12.6
12.7 Difference between Double Entry System and 12.7
Double Account System
UNIT 13 DOUBLE ACCOUNTING SYSTEM – 224
ACCOUNTS OF ELECTRICITY COMPANIES
13.1 Final Accounts of electricity companies 225
13.2 Specimen of final accounts of electricity 227
companies
13.3 Financial Provisions affecting accounts 234
13.4 Reasonable return and Disposal of Surplus 236
13.5 Repairs and renewal 244
13.6 Replacement of an asset 245
13.7 New forms 249
BLOCK 5 RECENT TRENDS IN ACCOUNTING
UNIT 14 ACCOUNTING STANDARDS 254
14.1 Introduction to Accounting Standards 255
14.2 Need for Global Standards 256
14.3 Formulation of Accounting Standards in India 257
g
UNIT 15 INFLATION ACCOUNTING 261
15.2 Limitations of Conventional Financial Statements 263
15.3 Meaning of Inflation Accounting 264
15.4 Methods of Inflation Accounting 264
15.5 Current Purchasing Power Method 264
15.6 Current Cost Accounting Method (CCA) 273
15.7 Adjustments and Provisions Required 273
15.8 Evaluation of C.C.A. system 282
15.9 Hybrid Method 282
15.10 India and Price Level Accounting 282
UNIT 16 HUMAN RESOURCES AND SOCIAL 285
ACCOUNTING
16.1 Meaning and Definition of Human Resource 286
Accounting
16.2 Objectives of Human Resource Accounting 287
16.3 Assumption underlying Human Resource 288
Accounting
16.4 Methods of valuation of Human Assets 288
16.5 Human Resource Cost Accounting 289
16.6 Human Resources Value Accounting 291
16.7 Benefits of Human Resource Accounting 295
16.8 Problems and limitation of Human Resource 297
Accounting
16.9 Human Resource Accounting in India 298
16.10 Meaning of Social Accounting 299
16.11 Measurement of Social Cost Benefit 299
16.12 Proforma of Social Accounting Statement 300
16.13 Corporate Social Responsibility 304
UNIT 17 VALUED ADDED STATEMENT AND 308
ECONOMIC VALUE ADDED
17.1 Meaning and concept of value-added statement 309
h
17.2 Uses of the value added 309
17.3 Distraction between gross and net value added 310
17.4 Meaning of Economic value added 313
17.5 Calculation of Economic value added 313
UNIT 18 ACCOUNTING IN COMPUTERISED 321
ENVIRONMENT
18.2 Role of the Computer in Accounting 322
18.3 Features of Computerized Accounting 323
Environment
18.4 Comparison between Manual and Computerized 324
Accounting
18.5 Advantage of Computerized Accounting 325
18.6 Accounting Software 326
i
BLOCK 1
INTRODUCTION TO ADVANCED CORPORATE
ACCOUNTING
UNIT 1: ADVANCE COMPANY ACCOUNTS -

UNIT 2 : ABSORPTION AND EXTERNAL

RECONSTRUCTION
UNIT 3: INTERNAL RECONSTRUCTION
UNIT 4: SHARES BUY BACK ACCOUNTING
1
UNIT 1
ADVANCED COMPANY ACCOUNTS -

STRUCTURE
Overview
Learning Objectives
1.1 Introduction
1.2 Definitions
1.3 Types of Amalgamation
1.3.1 Amalgamation in the Nature of Merger
1.3.2 Amalgamation in the Nature of Purchase

1.4 Purchase Consideration
1.5 Methods of Calculating Purchase Consideration
1.5.1 Lump Sum Method

1.5.2 Net Worth Method (or Net Assets Method)
1.5.3 Net Payment Method
1.5.4 Shares Exchange Method (or Intrinsic Value Method)

1.6 Accounting Treatment
1.6.1 Accounting Entries in the Books of Vendor
Companies (Transferor Company)

1.6.2 Accounting Entries in the Books of New Company
(Amalgamated Company)
1.6.3 Solved Problems

Let us sum up
Check your progress
Glossary
Suggested readings
2
OVERVIEW
In 1994, a new company, Brooke Bond Lipton India Limited was formed
to take over the business of two existing companies - Brooke Bond India
Ltd and Lipton India Ltd. Brooke Bond India Ltd. and Lipton India Ltd.,
are called ‘amalgamating’ companies and Brooke Bond Lipton India Ltd.,
is called ‘amalgamated’ company. The changes in socio-economic
condition through privatisation and globalisation necessitated the Indian
companies to think of moderisation and diversification.
LEARNING OBJECTIVES
• describe the meaning and types of Amalgamation
• explain the meaning and computation of purchase consideration
• close the books of liquidating companies
• pass incorporating entries in the books of new firm
• prepare opening Balance Sheet of new firm
1.1 INTRODUCTION
Sometimes companies carrying on similar business combine with each
other to obtain the economies of large-scale production or to avoid the
disastrous results of cutthroat competition. It is being done by
Amalgamation and Absorption. The term amalgamation is used when
two or more companies carrying on similar business go into liquidation
and a new company is formed to take over their business. The term
absorption is also used when an existing company takes over the
business of one or more existing companies. These concepts have been
modified by the Accounting Standard 14(AS-14)- "Accounting for
Amalgamation", issued by the Institute of Chartered Accountants of
India. This standard is applicable in respect of accounting periods
commencing on or after 1st April 1995 and is mandatory in nature. This
standard specifies the procedure of accounting for amalgamations and
the treatment of any resultant goodwill or reserve.
1.2 DEFINITIONS
The following terms with specified meaning have been used in this
standard:
1) Amalgamation means an amalgamation pursuant to the
provisions of the Companies Act, 1956 or any other statute which
may be applicable to companies.
2) Transferor Company means the company which is amalgamated
into another company.
3
3) Transferee Company means the company into which a
transferee company is amalgamated..
1.3 TYPES OF AMALGAMATION
From accounting point of view there are two types of amalgamation
(1) Amalgamation in the nature of merger, and
(2) Amalgamation in the nature of purchase
1.3.1 Amalgamation in the Nature of Merger
As amalgamation should be considered to be an amalgamation in the
nature of merger when all the following conditions are satisfied.
1) All the assets and liabilities of the transferor company become,
after amalgamation, the assets and liabilities of the transferee
company.
2) Shareholders holding not less than 50% of the face value of the
equity shares of the transferor company (other than the equity
shares already held therein immediately before the
amalgamation, by the transferee company or its subsidiaries or
their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation
3) The business of the transferee company is intended to be carried
on, after the amalgamation, by the transferee company.
4) No adjustment is intended to be made to the book values of the
assets and liabilities of the transferor company when they are
incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
5) The consideration to the shareholders of transferor company,
(willing to become shareholders of transferee company) is
discharged by issue of equity shares in transferee company.
6) The method confined to the merger type of amalgamation is
“Pooling of interest method”.
1.3.2 Amalgamation in the Nature of Purchase

Amalgamation which does not satisfy any one or more of the conditions
specified above. Thus, fulfillment of above six conditions is essential to
call it as merger. If anyone is not satisfied, it becomes purchase.
4
1.4 PURCHASE CONSIDERATION
Purchase consideration is the amount which is paid by the transferee
company for the purchase of the business of the transferor company. In
other words, consideration for amalgamation means the aggregate of
the shares and other securities issued and payment in cash or other
assets by the transferee company to the shareholders of the transferor
company.
1.5 METHODS OF CALCULATING PURCHASE CONSIDERATION
There are four methods of calculating purchase consideration. They are
discussed below.
1.5.1 Lump Sum Method
When the transferee company agrees to pay a fixed sum to the

transferor company, it is called a lump sum payment of purchase
consideration. For example, if X Ltd. purchases the business of Y Ltd.
and agrees to pay Rs.25,00,000 in all, it is an example of lump sum
payment.
1.5.2 Net worth Method (or Net Assets Method)
According to this method, the purchase consideration is calculated by
calculating the net worth of the assets taken over by the transferee
company. The net worth is arrived at by adding the agreed value of
assets taken over by the transferee company minus agreed value of
liabilities to be assumed by the transferee company.
1.5.3 Net Payment Method
Under this method purchase consideration is calculated by adding the

various payments in the form of shares, securities, cash etc. made by
the transferee company. No amount of liabilities is deducted even if
these are assumed by the purchasing company.
1.5.4 Shares Exchange Method (or Intrinsic Value Method)
Under this method purchase consideration is required to be calculated
on basis of intrinsic value of shares. The intrinsic value of a share is
calculated by dividing the net assets available for equity shareholders by
the number of equity shares. This value determines the ratio of
exchange of the shares between the transferee and transferor
companies. In some cases, the agreed values of the shares of both the
companies are given.
5
1.6 ACCOUNTING TREATMENT
The accounting treatment for Amalgamation, absorption and external
reconstruction are more or less one and the same i.e. one or more
companies are going to be liquidated and the purchasing company may
be an existing one or newly formed.
In Amalgamation, there will be a minimum of two liquidations and the
formation of a new company. Though two or more companies are joined
together to form a new company, the companies thus liquidated will be
treated as a vending company and the new company is termed as
purchasing company. Hence under Amalgamation, we have to close the
two vendor companies’ books of account and to open books of account
in the new company with the help of incorporating entries
1.6.1 Accounting entries in the Books of Vender Companies
(Transferor Company)
The books of the transferor company being wound up will be closed in
the same way as the books of a partnership firm being dissolved. The
following entries are made:
(1) For transferring assets taken over by the transferee company
Realisation Account Dr.
To Various Assets individually (at book value)
Note: Assets which are not taken over by the purchasing company as
cash, the bank balance will not be transferred to Realisation Account.
(2) For transferring liabilities Dr. (at Book value)
Various Liabilities (Individually)

To Realisation Account
(3) For purchase consideration
New Company's A/c Dr.

To Realisation A/c
(4) For receiving purchase consideration from the transferee
company
Bank A/c Dr.
Shares in New company A/c Dr.
To New company’s A/c
6
(5) For assets sold by the transferor company not taken over by the
transferee company.
Bank A/c Dr.
To Realisation A/c
(6) For liquidation expenses
a) If the expenses are to be met by the vendor company
Realisation A/c Dr.
To Bank A/c
b) If the expenses are to be met by the new company
No entry
(c) If liquidation expenses are included in the purchase
consideration and not paid separately by the

purchasing company.
Realisation A/c Dr.
To Bank A/c
(7) For liabilities not taken over by the transferee company when paid by
the vendor company.
Realisation A/c Dr.
To Bank A/c
(8) For Closing Realisation Account
a) If Profit
Realisation A/c Dr.
To Equity shareholders A/c
b) If loss
Equity Shareholder A/c Dr.
To Realisation A/c
(9) For transferring Preference Share Capital

Preference Share Capital A/c Dr.
To Preference shareholders A/c
(10) For transferring equity share capital and accumulated profit:

Equity Share Capital A/c Dr.
7
General Reserve A/C Dr.
Debenture Redemption Fund Dr.
Dividend Equalisation Reserve Dr.
Share Premium A/c Dr.
Profit & Loss A/c Dr.
Accident Compensation Fund Dr.
(to the extent it does not denote liability)
Shares Forfeited A/c Dr.
Profit Prior to Incorporation A/c Dr.
Any Other reserve or fund A/c Dr.
To Equity shareholders A/c
(11) For transferring accumulated loss and expenses not

written-off
Equity Shareholders A/c Dr.
To Profit & Loss A/c
To Discount or Expenses on Issues of Shares or
Debentures
To Preliminary Expenses
To Underwriting Commission
(12) For paying shareholders
Preference Shareholders A/c Dr.

Equity Shareholders A/c
To Bank or Shares in New Company
1.6.2 Accounting Entries in the Books of New company

(Amalgamated Company)
In the books of the new company, minimum two sets of incorporating
entries to be passed to record the assets and liabilities taken over from
vendor companies, and for the settlement of purchase consideration.
The journal entries are as follows:
(a) Business Purchase A/c Dr.

To Liquidator of vendor company
(Being the business of vendor company has been purchased)
8
(b) Sundry assets A/c Dr.
To sundry liabilities take over (at agreed values)
To Business Purchase A/c
(With the purchase consideration)
(Being sundry assets and liabilities of vendor company
incorporated)
(The difference between debit and credit will be treated either as
goodwill or capital reserve)
(c) Liquidator of vendor company A/c Dr.
To Bank A/c
To Equity Share Capital A/c
To Preference Share Capital A/c

To Debenture A/c
To Premium on Shares A/c
(Being purchase consideration settled)
1.6.3 Solved problems
Illustration: 1
A Ltd. and B Ltd. agreed to amalgamate and form a new company, C
Ltd. which will take over all the assets and liabilities of the two
companies.
In the case of A Ltd. the assets and liabilities are to be taken over at
book value for shares in C Ltd., at the rate of 5 shares in C Ltd. at 10%
premium (i.e. Rs.11 per share) for every four shares in A Ltd. In the
case of B Ltd.
(1) The debentures of B Ltd. would be paid off by the issue of an
equal number of debentures in C Ltd., at a discount of 10%
(2) The holders of 6% preference shares of B Ltd. would be
allotted four, 7% preference shares of Rs. 100 each in C Ltd.
for every five preference shares in B Ltd.
(3) The equity shareholders would be allotted sufficient shares in
C Ltd. to cover the balance on their accounts after adjusting
asset values by reducing plant and machinery by 10% and
providing 5% on sundry debtors.
The Summarised Balance Sheets of the two companies just prior to
amalgamation were as follows:
9
B Ltd.
A Ltd. Rs.
Rs.
Equity share capital of Rs.10 each 5,00,000
4,00,000
6% Preference shares of Rs.100 each 3,00,000
-
4% Debentures 2,00,000
-
Profit and Loss A/c -
5,00,000
Contingency Reserve -
50,000
Creditors 90,000
75,000
10,90,000
10,25,000
Plant and Machinery 8,00,000
8,00,000
Stock 60,000
65,000
Debtors 50,000
95,000
Profit and loss A/c 1,40,000
-
Bank 40,000
65,000
10,90,000
10,25,000
Show the Journal entries in the books of A. Ltd and B Ltd and show the
Balance Sheet of C.Ltd.
Solution:
Calculation of purchase consideration: (For A.Ltd.)

Shareholders of A.Ltd are to get 5 shares in C.Ltd. @Rs.11 per share for
every 4 shares in A.Ltd.
A.Ltd. has 40,000 shares and so shareholders of A.Ltd. will get 50,000
(1.e. 5/4 x 40,000) shares @Rs.11 per share.
Thus purchase consideration is Rs.5.50,000 (1.e.. 50,000 x 11)
Calculation of purchase consideration: (For B.Ltd.)

Value of assets taken over by C.Ltd Rs.
Plant and Machinery (8,00,000 less 10%) 7,20,000
Stock 60,000
Debtors Rs.50,000 less 5% provision for bad debts 47,500
Bank 40,000
8,67,500
Less: Creditors taken over 90,000
10
Purchase consideration 7,77,500
Purchase consideration is discharged as follows:

Mode of Payment Rs.
4% debenture holders to Issue of equal no. of debentures 1,80,000

get at a discount of 10%, i.e.,
2,00,000x90/100
6% Preference 7% preference shares of Rs. 100 2,40,000
shareholders to get each @ 4 preference shares for
every 5 preference shares in
B.Ltd. i.e. 2,400 (3,000x4/5)
Equity shareholder to get 35,750 equity shares of Rs. 10 3,57,500
each, i.e., balance of purchase
consideration
7,77,500
A Ltd.
JOURNAL
Particulars Dr. Cr.
Rs. Rs
Realisation A/c Dr. 10,25,000
To Plant and Machinery 8,00,000
To Stock 65,000
To Debtors 95,000
To Bank 65,000
(Being the transfer of assets to Realisation A/c)
Creditor A/c Dr. 75,000
To Realisation A/c 75,000
(Being the transfer of creditors to Realisation A/c)
C.Ltd. Dr. 5,50,000
To realization A/c 5,50,000
(Being the purchase consideration agreed to be paid by C.Ltd)
Equity shares in C.Ltd A/c Dr. 5,50,000
To C. Ltd. 5,50,000
(Being the loss on realization transferred to equity shareholders
A/c)
Equity shareholders A/c Dr. 4,00,000
To Realisation A/c 4,00,000
(Being the loss on realization transferred to equity shareholders)
Equity Share Capital A/c Dr. 4,00,000
Profit and Loss A/c Dr. 5,00,000
Contingency Reserve A/c Dr. 50,000
11
To Equity shareholders A/c 9,50,000
(Being the transfer of various accounts to equity shareholders A/c)
Equity shareholders A/c Dr. 5,50,000
To Shares in C. Ltd 5,50,000
(being the amount due to shareholders paid by giving shares in
C.Ltd)
Realisation account
Particulars Rs. Particulars Rs.
To Plant/ Machinery 8,00,000 By Creditors 75,000
To Stock 65,000 By C Ltd (purchase consideration) 5,50,000
To Debtors 95,000 By equity shareholders A/c 4,00,000
To Bank 65,000
10,25,000 10,25,000
Equity shareholder’s account
To share in C Ltd 5,50,000 By Equity Share Capital 4,00,000
To realization loss 4,00,000 By Profit and Loss A/c 5,00,000
By Contingency revenue 50,000
9,50,000 9,50,000
Share in C Ltd
To C Ltd 5,50,000 By Equity Shareholders A/c 5,50,000
5,50,000 5,50,000
B Ltd.
Journal
Dr. Cr.
Particulars
Rs. Rs
To Stock 60,000
To Debtors 50,000
To Bank 40,000
12
(Being transfer of assets to Realisation A/c)
Creditor A/c Dr.90,000
(Being the transfer of creditors to Realisation A/c)
C.Ltd. Dr.
7,77,500
To realization A/c 7,77,500
(Being the purchase consideration due from C.Ltd)
Debentures in C.Ltd A/c Dr. 1,80,000
7% Preference shares in C Ltd. A/c 2,40,000
Equity shares in C Ltd. A/c 3,57,500
To C. Ltd. 7,77,500
(Being receipt of purchase consideration A/c)
4% Debentures A/c Dr. 2,00,000
To 4% Debentureholders A/c 2,00,000
(being the transfer of Debentures a/c to Debenture holders
A/c)
6% Preference share capital A/c Dr. 3,00,000
To 6% Preference shareholders A/c 3,00,000
(Being the transfer of 6% preference share capital A/c to
Preference shareholders A/c)
4% Debenture holder’s A/c Dr. 2,00,000
To debentures in C. Ltd 1,80,000
(Being the payment of debenture holders and Profit thereon
transferred to Realisation A/c)
6% preference shareholders A/c Dr. 3,00,000
To 7% Preference share in C Ltd. A/c 2,40,000
(Being the payment of preference shareholders & profit
thereon transferred to Realisation A/c)
Equity Shareholders A/c Dr. 1,42,500
To Profit and Loss A/c 1,40,000
(Being the losses transferred)
Equity Share Capital A/c Dr. 5,00,000
To Equity Shareholders A/c 5,00,000
(Being the transfer of Equity Share Capital A/c)
Equity Shareholders A/c Dr. 3,57,500
To Equity Shares in C. Ltd. 3,57,500
(Being payment due to equity share holders made)
13
B Ltd.
Realisation A/c
To Plant / Machinery 8,00,000 By Creditors 90,000
To Stock 60,000 By C. Ltd. 7,77,500
To Debtors 50,000 By Debenture Holder A/c 20,000
To Bank 40,000 By Pre. Share Holders A/c 60,000
By Equity Share Holders A/c 2,500
9,50,000 9,50,000
Equity Share Holders A/c
To Profit and Loss A/c 1,40,000 By Equity Share capital 5,00,000
To Realisation 2,500
To Equity Shares in C Ltd. 3,57,500
5,00,000 5,00,000
4% Debenture holder’s A/c
To Realisation 20,000 4% debenture a/c 2,00,000
To Debenture in C Ltd 1,80,000
2,00,000 2,00,000
6% Preference Share holder’s A/c
To Realisation 60,000 By 6% Pre. Share capital 3,00,000
To 7% Pre. Share in C Ltd 2,40,000
3,00,000 3,00,000
14
Books of C Ltd
Balance Sheet of C.Ltd.
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
2,400, 7% preference Plant & Machinery 15,20,000
Share of Rs.100 each 2,40,000 Current Assets:
85,750 equity shares of 8,57,500 Stock 1,25,000
Rs.10 each fully paid up
(All these shares have been Debtors 1,45,000
issued to vendors for other
than cash)
Reserve and Surplus: Less : Provision for bad
Capital reserve(1) 4,00,000 Debts 2,500 1,42,500
Share premium (2) 50,000 Bank 1,05,000
Secured Loans: Miscellaneous expenditure:
4% Debentures 2,00,000 Discount on issue of 20,000
debentures
Current Liabilities:
Sundry creditors 1,65,000
19,12,500 19,12,500
Working Notes:
(1) Capital reserve has arisen in case of purchase of business of A. Ltd.
As shown below:
Value of assets taken over Rs.
Plant and Machinery 8,00,000
Stock 65,000
Debtors 95,000
Bank 65,000
10,25,000
Less: Creditors taken over 75,000
9,50,000
Less: Purchase consideration 5,50,000
4,00,000
There is no capital reserve in case of purchase of business of B. Ltd.

Because purchase consideration is payable on the basis of net value of
assets taken over.
15
(2) Calculation of Share Premium 50,000 shares have been issued to
shareholders of A Ltd. At a premium of Re.1 per share. Therefore,
share premium is Rs.50,000 (i,e.50,000x1).
LET US SUM UP
One of the ways business combinations are formed is through merger
which may take the form of amalgamation or absorption. When a new
company is formed to take over the business of two or more existing
companies, it is known as amalgamation. Though two or more
companies liquidated to form a new company, the liquidating companies
are treated as vendor company and entries are passed as such. The
new company is treated as purchasing company and treated as such.
The purchase consideration is to be calculated by any one of the
methods out of four methods.
CHECK YOUR PROCESS

1. Accounting standard for amalgamation is
a) AS-8 b) AS-20 c) AS-14 d) AS-3
2. Goodwill arising on Amalgamation is to be
a) Retained in the books of the transferee company.
b) Amortised to income on a systematic manner
c) Adjusted against transferee company’s reserve and P/L a/c
d) Either (a) and (c)
3. As per AS-14, purchase consideration is what is payable to
a) shareholders
b) shareholders and debenture holders
c) shareholders and creditors
d) debenture holders and creditors

4. Pooling of interest method is used to account for amalgamation in
the nature of
a) purchase b) sale c) merger d) None

5. The process of two or more companies combining to form a new
company is called ___________
a) absorption b) amalgamation
c) External reconstruction d) none
6. In case of amalgamation _______
16
a) Two or more liquidation and one formation
b) one liquidation and one formation
c) liquidation only
d) formation only
GLOSSARY
Amalgamation : Taking over of the business of two or more
companies by a newly formed company for
this purpose
Purchase : The amount payable by the purchasing
consideration company to the vendor company for taking
over the business.
Trade Liabilities : Liabilities incurred on account of purchase of

goods.
SUGGESTED READINGS
1. Arulanandam, M.A., and Raman K.S. (2009), Advanced
Accounting, Himalaya Publishing House, Mumbai.
2. Gupta R.L. and Radhaswamy, (2009), Advanced Accountancy,
Sultan Chand & Sons, New Delhi.
3. Jain, S.P. and Narang, K.L. (2014), Advanced Accountancy,
Kalyani Publisher, Ludhiana.
4. Pillai R.S.N. Bagavathi and Uma. S (2010), Fundamentals of
Advanced Accounting, S.Chand & Company Private Limited,
New Delhi.
5. Rajasekaran .V and Lalitha, R. (2011), Advanced Accounts,
Pearson, New Delhi.
6. Reddy, T.S. and Murthy, A. (2015), Corporate Accounting,
Margham Publications, Chennai.
WEB RESOURCES
1. Amalgamation of Companies| Purpose, Objectives, Benefits &
Types|Video-3| Explained in Tamil |BR - Bing video
2. 2 Problems in Purchase Consideration| Net assets method|Video6|
Amalgamation & Absorption|Tamil|BR - Bing video
3. Meaning of Amalgamation, Absorption and External
Reconstruction|Video-1 Corporate Accounting-IITamil - Bing video
4. Accounting Steps in Amalgamation of Companies|Video-5| Corporate
Accounting-II |Explained in TamilBR - Bing video

1. c) 2. b) 3. a) 4. c) 5. b) 6. a)
17
UNIT 2
ABSORPTION AND EXTERNAL

RECONSTRUCTION
STRUCTURE
Overview
Learning Objectives
2.1 Introduction
2.2 Meaning of Absorption and External Reconstruction

2.2.1 Accounting Treatment
2.3 Solved Problems
2.4 Inter Company Owings

2.5 Inter Company Holdings
2.5.1 When the purchasing company holds shares in the
vendor company
2.5.2 When the vendor company holds shares in
purchasing company
2.5.3 When shares are mutually hold

Let us sum up
Check your progress
Glossaries
Suggested readings
OVERVIEW
Now Indian Companies are facing competitions from both internal and
external. Globalisation paves the easy way for the Multi-National
Companies to enter into Indian Market. To face the worldwide
competition, an organization should be sound both in financial and
managerial aspects. The earliest way to avoid competition and also to
augment the strength, is to takeover other similar companies. But this
need not be the only motive for all the takeovers. The ICICI Bank Ltd.
took over Bank of Madura Ltd., just to expand its banking activities
through the existing branches of the latter.
18
LEARNING OBJECTIVES
• distinguish between Amalgamation, External reconstruction,
Absorption.
• close the books of vendor company.
• prepare opening balance sheet of purchasing company with
the help of incorporating entries.
• treat the intercompany owing and to remove the unrealized
profit.
• compute purchase consideration under different situations of
intercompany holding.
2.1 INTRODUCTION
The Companies Act 2013 permits the liquidator of a company to accept
shares or any other interest in the transferee company for the
distribution among the members of liquidating company. This means a
company forcing into liquidation can be purchased by some other
company, new or existing. The phenomenon of purchase of a business
of a corporate body by another corporate body is described as
‘amalgamation’, ‘absorption or external reconstruction’.
2.2 MEANING OF ABSORPTION AND EXTERNAL
RECONSTRUCTION
Absorption means when an existing company goes into liquidation and
some existing company buys the business.
External Reconstruction is used when one existing company goes into
liquidation and a new company formed for the purpose, buys its
business.
2.2.1 Accounting Treatment

The mode of calculating purchase consideration is same as we have
already discussed in the previous unit. The entries in the books of
vendor company and the purchasing company are also same as already
discussed. Thus, in the case of Amalgamation, absorption and external
reconstruction, the approach is common, and the accounting treatment
is similar in the sense that (a) closing entries are to be made in the
books of the liquidating company to close its book and (b) opening
entries are to be made in the books of the purchasing company to
incorporate the assets and liabilities taken over.
19
2.3 SOLVED PROBLEMS
Illustration 1 (Net Assets Method)
Balance Sheet of Week Ltd. as on March 31, 2018
Share Capital 2,00,000 Goodwill 35,000
2,000 share of Rs.100 each Land and Buildings 85,000
Reserve Fund 20,000 Plant & Machinery 1,60,000
5% Debentures 1,00,000 Stock 55,000
Loan from A (Director) 40,000 Debtors 65,000
Sundry Creditors 80,000 Cash Bank 34,000
Discount on debentures 6,000
4,40,000 4,40,000
The business of Weak Ltd. is taken over by the Strong Ltd. as on that
date, on the following terms: (a) Strong Ltd. to take over the assets
except cash, to value the assets at their book values less 10% except
goodwill which was to be valued at 4 years’ purchase of the excess of
average (5 years) profits over 8% of the combined amount of share
capital and Reserve, (b) Strong Ltd. to take over trade creditors which
were subject to a discount of 5%, (c) The purchase consideration was to
be discharged by cash to the extent of Rs.1,50,000 and balance in fully
paid equity shares of Rs.10 each valued at Rs.12.50 per share.
The average of five years’ profits was Rs.30,100. The expenses of
liquidation amounted to Rs.4,000. Show the necessary accounts in the
books of Weak Ltd. and Journal entries in the books of Strong Ltd.
Solution:
Calculation of goodwill:
Average of the 5 years’ profits = Rs. 30,100

Less: 8% of share capital and
Reserve (2,20,000x8/100) = Rs.17,600
Excess = Rs. 12,500

Goodwill = 12,500 x 4 = Rs.50,000
20
Calculation of Purchase Consideration (Net Assets Method)
Goodwill = Rs. 50,000
Land and building (85,000-8,500) = Rs. 76,500
Plant and Machinery (1,60,000 – 16,000) = Rs. 1,44,000
Stock (55,000 – 5,500) = Rs. 49,500
Debtors (65,000 – 6,500) = Rs. 58,500
= Rs. 3,78,500
Less : Creditors (80,000 – 40,000) = Rs. 76,000
Purchase consideration = Rs. 3,02,500
Less : Cash = Rs. 1,50,000
Shares to be given = Rs. 1,52,500
Rs.1,52,500
Number of shares to be given = = 12,200 shares
12.50
In the Books of Weak Ltd.

Realisation Account
To Goodwill 35,000 By Sundry Creditors 80,000
To Land and Buildings 85,000 By Strong Ltd.
To Plant and Machinery 1,60,000 (Purchases 3,02,500

consideration)
To Stock 55,000 By Loss: Share holders
To Debtors 65,000 A/c 21,500
To Bank expenses 4,000
4,04,000 4,04,000
Equity Shareholders Account
To Discount on debentures 6,000 By Share Capital 2,00,000
To Realiation A/c Loss 21,500 By Reserve Fund 20,000
21
To Shares in Strong Ltd. 1,52,500
To Bank 40,000
To Bank expenses 4,000
2,20,000 2,20,000
Shares in Strong Ltd.
To Strong Ltd. 1,52,500 By Shareholders A/c 1,52,500
1,52,500 1,52,500
Bank Account
To Balance b/d 34,000 By 5% debenture
To Strong Ltd. 1,50,000 holders A/c 1,00,000
By Loan from A 40,000
By Realisation A/c 4,000
By Shareholders A/c 40,000
1,84,000 1,84,000
Strong Ltd.
Journal
Date Particulars Dr. Cr.

Rs. Rs.
1998 Business Purchases A/c Dr. 3,02,500

Mar.31 To Liquidators of Weak Ltd. 3,02,500
(Being the purchase
consideration due)
Land and Buildings A/c Dr. 76,500

Plant and Machinery A/c Dr. 1,44,000
Stock A/c Dr. 49,500
Debtors A/c Dr. 58,500
Goodwill A/c Dr. 50,000
22
To Creditors 76,000
To Business Purchase A/c 3,02,500
(Being the assets & Liabilities
taken over)
Liquidators of Weak Ltd. Dr. 3,02,500

To Equity Share Capital A/c 1,22,000
To Share Premium A/c 30,500
To Bank A/c 1,50,000
(Being the settlement of the
purchase consideration due)
Illustration 2 (Net Payment Method)

X Co. Ltd. agreed to acquire the assets excluding cash as on 31st
December 2011 of Y Co. Ltd. The balance sheet of Y Ltd. as on the date
was:
Equity Capital Goodwill 60,000
(Shares of Rs.10 each) 3,00,000 Land & Buildings 1,20,000
General reserve 80,000 Plant & Machinery 2,00,000
Debentures 50,000 Stock 80,000
Creditors 10,000 Debtors 30,000
Profit and Loss A/c 60,000 Cash 10,000
5,00,000 5,00,000
The consideration was as follows:

a) A cash payment of Rs.4 for every share of Y Ltd.
b) The issue of one share of Rs.10 each (Market value Rs.12.50) in
the X Co. Ltd. for every share in Y Co. Ltd.
c) The issue of 1,100 debentures of Rs.50 each in X Co. Ltd.
enable Y Ltd. to discharge its debentures at a premium of 10%.
d) The expenses of liquidation of Y Ltd. amounting to Rs.4,000 was
to be met by themselves.
Give the journal entries in the books of both the companies and
important ledger accounts in the books of Y Ltd.
23
Solution:
Calculation of purchase consideration:
Cash - 30,000 x Rs. 4 = Rs. 1,20,000
Shares - 30,000 x Rs. 10 = Rs. 3,00,000
Debentures - 1,100 x Rs. 50 = Rs. 55,000
Purchases consideration = Rs. 4,75,000
JOURNAL OF Y LTD.
Particulars Rs. Rs.

To Goodwill 60,000
To Land and Buildings 1,20,000
To Stock 80,000
To Debtors 30,000
Creditors A/c Dr. 10,000

Realisation A/c Dr. 5,000

To Debenture holders’ A/c 5,000
Realisation A/c Dr. 14,000

To Cash A/c 14,000
(being creditors for exp.paid)
X Ltd. A/c Dr. 4,75,000

To Realisation A/c 4,75,000
(Purchase Consideration due)
Shareholders A/c Dr. 24,000

(Realisation loss)
Cash A/c Dr. 1,20,000

Shares in X Ltd. A/c Dr. 3,00,000
Debentures in X Ltd. A/c Dr. 55,000
24
To X Ltd. A/c 4,75,000
Share Capital A/c Dr. 3,00,000

General Reserve A/c Dr. 80,000
Profit and Loss A/c Dr. 60,000
To Shareholders’ A/c 4,40,000
Shareholders A/c Dr. 4,16,000

To Cash A/c 1,16,000
To Shares in X Ltd. A/c 3,00,000
Debentures A/c Dr. 50,000

To Debentures holders’ A/c 50,000
Debenture holders’ A/c Dr. 55,000

To Debentures in X Ltd. A/c 55,000
Ledger of Y Ltd.
REALISATION ACCOUNT
To Goodwill 60,000 By Creditors 10,000
To Land and Buildings 1,20,000 By X Ltd. A/c 4,75,000
To Plant and Machinery 2,00,000 By Shareholders A/c 24,000
To Stocks 80,000 (loss)
To Debtors 30,000
To Debenture holders A/c 5,000
To Cash-Creditors 10,000
Expenses 4,000 14,000
5,09,000 5,09,000
SHAREHOLDERS’ ACCOUNT
To Realisation A/c 24,000 By Share Capital 3,00,000
To Cash 1,16,000 By General Reserve 80,000
To Shares in X Ltd. 3,00,000 By Profit & Loss A/c 60,000
25
4,40,00 4,40,000
DEBENTURE HOLDERS’ ACCOUNT
To Debentures in X Ltd. 55,000 By Debentures A/c 50,000
By Realisation A/c 5,000
55,000 55,000
X LTD ACCOUNT
To Realisation A/c 4,75,000 By Cash 1,20,000
By Shares in X Ltd. 3,00,000
By Debentures in X Ltd. 55,000
4,75,000 4,75,000
CASH ACCOUNT
To Balance b/d 10,000 By Realisation A/c 14,000
To X Ltd. A/c 1,20,000 By Shareholders A/c 1,16,000
1,30,000 1,30,000
JOURNAL OF X LTD
Particulars Rs. Rs.
Business Purchases A/c Dr. 4,75,000

To Liquidator of Y Ltd. 4,75,000

Land and Buildings A/c Dr. 1,20,000
Plant and Machinery A/c Dr. 2,00,000
Stock A/c Dr. 80,000
To Business Purchase A/c 4,75,000
Liquidator of Y Ltd. Dr. 4,75,000
26
To Cash 1,20,000
To Equity Share Capital 3,00,000
To Debentures 55,000
Illustration 3 (External Reconstruction)
On 1st July, 2000 the balance sheet of Amrit Limited was as under:
Authorised & Issues capital Goodwill 1,00,000
3,000 % cumulative Sundry Assets 2,50,000
Preference shares of Rs.25 Cash 10,000
each fully paid 75,000 Profit & Loss A/c 1,90,000
8,000 equity shares of Rs.50
each, fully paid 4,00,000
6% Debentures 50,000
Creditors 25,000
5,50,000 5,50,000
Preference dividends were in arrears for two years. A scheme of

reconstruction agreed upon was as under: (1) A new company to be
formed, called Amrit (2000) Limited with an authorized capital of
Rs.5,00,000 all in equity shares of Rs.100 each. (2) One equity share of
Rs.100 each fully paid in the new company to be issued in exchange of
3 preference shares in the old company. (3) One equity shares of
Rs.100 each fully paid in the new company to be exchanged for 4 equity
shares in the old company. (4) Arrears of preference dividend to be
cancelled. (5) Debenture holders to receive 500 equity shares in the new
company as fully paid. (6) Creditors to be taken over by the new
company and immediately paid off. (7) The new company to issue
remaining equity shares for public subscription. (8) The new company to
take over old company’s assets, subject to revaluation of “sundry assets”
at Rs.2,65,000.
Prepare the necessary ledger accounts in the books of Amirit Limited

and open the books of the new company by means by journal entries,
assuming that the public subscription was fully responded.
27
Solution:
Purchase consideration is calculated as under:
1. 1,000 equity shares of Rs.100 each fully paid to = Rs. 1,00,000

be issued to the preference shareholders
2. 2,000 equity shares of Rs.100 each to be issued = Rs. 2,00,000

as fully paid to the equity shareholders
3. 500 equity shares of Rs.100 each to be shares = Rs. 50,000

as fully paid to the debenture holders.
Total purchase consideration = Rs. 3,50,000
Ledger of Amrit Limited

Realisation A/c
To Goodwill 1,00,000 By Creditors 25,000

To Sundry Assets 2,50,000 By Amrit (2000) Ltd 3,50,000
To Cash 10,000 By Equity share
To Preference shareholders A/c (loss) 10,000
holders 25,000
3,85,000 3,85,000
EQUITY SHAREHOLDERS’ ACCOUNT

To Profit & Loss A/c 1,90,000 By Equity share capital A/c 4,00,000
To Shares in Amrit
(2000) Limited 2,00,000
4,00,000 4,00,000
PREFERENCE SHAREHOLDER’S ACCOUNT

To Shares in Amrit By Preference Share
(2000) Limited 1,00,000 Capital A/c 75,000
By Realisation 25,000
1,00,000 1,00,000
28
JOURNAL OF M/S AMRIT (2000) LTD.
Particulars Rs. Rs.
Goodwill A/c Dr. 1,00,000
Sundry Assets A/c Dr. 2,65,000
Cash A/c Dr. 10,000
To Creditors A/c 25,000
To Liquidators of M/s Amrit Ltd. 3,50,000
(Being the business of M/s Amrit Ltd taken
over)
Liquidators of M/s Amrit Ltd. Dr. 3,50,000
To Equity share capital A/c 3,50,000
(Being purchase consideration discharged
by the issue of 3,500 equity shares of
Rs.100 each as fully paid)
Cash A/c Dr. 1,50,000
To Equity share capital A/c 1,50,000
(Being issue of the remaining 1,500 equity
shares)
To Cash A/c 25,000
(Being cash paid to creditors)
2.4 INTER COMPANY OWINGS
At the time of absorption, it may be seen that the purchasing company

already stand as a debtor or creditor in the vendor company’s books. It
may be the result of purchase / sale transactions taking place between
these companies. The situation is worth considering when unsold stock
(sold by purchasing company) stands as stock at the end in the books of
vendor company. These transactions call for additional entries in the
books of “Purchasing Company”.
a) For cancelling the common debts
Creditors Ac Dr. (in purchasing company book)
To Debtors (vendor company debtor)

The entry will be reversed in the other situation.
b) For cancelling unrealized profit
Profit and Loss A/c Dr.

To Stock Reserve A/c
(No need for passing entry in the books of vendor company)
29
Illustration 4
Following are the balance sheets of S Ltd. and P Ltd. as on 31st March,
2000:
S P S P
Particulars Particulars
Rs. Rs. Rs. Rs.
Share Capital Fixed assets 1,20,000 2,50,000
in Rs.10 1,00,000 2,00,000 Loan to P Ltd. 10,000 --
Reserve Fund 40,000 60,000 Debtors (including
Workmen compe- S Ltd. (Rs.5,000) -- 20,000
nsation fund 10,000 -- Debtors 30,000 --
Creditors (include Stock 20,000 30,000
ng P Ltd. Rs.5000) 30,000 - Cash at Bank -- 10,000
Creditors -- 40,000
Loan from S Ltd. -- 10,000
1,80,000 3,10,000 1,80,000 3,10,000
P Ltd agreed to absorb S Ltd. on the following terms: P Ltd. shall give I
share of Rs.35 each for every 3 shares in S Ltd. You are informed that
stock of S Ltd. includes stock worth Rs.15,000 purchased by them from
P Ltd. which were sold to them at a profit of 20% on cost. The shares of
P Ltd. are quoted in the market at Rs.45 per share. Open ledger
accounts of S Ltd. and give journal entries in P Ltd. Draft the balance
sheet of P Ltd. after the purchase of business.
Solution:
Calculation of purchase consideration:
Number of shares 1/3 x 10,000 = 3,333 1/3 shares
Value of shares (leaving fraction),

3,333 x Rs.35 = Rs.1,16,655
Fraction is to be satisfied in cash
which is based on the market value

of the share.
Thus the amount paid in cash 1/3 x Rs.45 = 150000
Total purchase consideration = 1,16,670
30
Books of S Ltd.
REALISATION ACCOUNT
To Fixed Assets 1,20,000 By Creditors 30,000
To Loan to P Ltd. 10,000 By P Ltd. 1,16,670
To Debtors 30,000 By Shareholders –Loss 33,330
To Stock 20,000
1,80,000 1,80,000
SHAREHOLDERS’ ACCOUNT
To Realisation A/c 33,330 By Share Capital 1,00,000
To Share in P Ltd. 1,16,655 By Reserve Fund 40,000
To Bank 15 By Workmen
Compensation 10,000
1,50,000 1,50,000
P Ltd
To Realisation A/c 1,16,670 By Share in P Ltd. 1,165,655
By Bank 15
1,16,670 1,16,670
Books of P Ltd JOURNAL
Particulars Rs. Rs.
Fixed assets of S Ltd. Dr. 1,20,000

Loan Dr. 10,000
Debtors Dr. 30,000
Stock Dr. 20,000
To Creditors 30,000
To Liquidator of S Ltd. 1,16,670
To Capital Reserve 33,330
(Being purchase of assets and liabilities of S
Ltd.)
Liquidator of S Ltd. Dr. 1,16,670
31
To Share Capital 1,16,655
To Bank 15
(Being payment of purchase consideration)
Loan from S Ltd. (Books of P Ltd.) Dr. 10,000

To Loan to P Ltd. (Books of S Ltd. now 10,000
new balance)
(Entry for cancellation of common debt)
Creditors (Books of S Ltd.) Dr. 5,000

To Debtors (Books of P Ltd.) 5,000
(Entry for cancellation of common debt)
Profit and Loss of P Ltd. Dr. 2,500

(or Goodwill A/c or Capital reserve) 2,500
To Stock (now purchased from S Ltd.)
(Entry for cancellation of unrealized profit on
stock left unsold with S Ltd.)
BALANCE SHEET OF P LTD

Share Capital Fixed Assets:
Shares of Rs.35 each 1,16,655 P Ltd. 2,50,000
Shares of Rs.10 each 2,00,000 S Ltd. 1,20,000 3,70,000
Reserve Fund 60,000 Debtors:
Creditors: P Ltd. 15,000
P Ltd. 40,000 S Ltd. 30,000 45,000
S Ltd. 25,000 65,000 Stock:
Capital reserve 33,330 P Ltd. 30,000
Less: Unrealised profit 2,500 30,830 S Ltd. (20000-2500) 17,500
47,500
Cash & Bank (10000- 9,985
15)
4,72,485 4,72,485
20% on cost = 1/6th on sale. Profit = 1/6 x Rs.15,000 = Rs.2,500.

2.5 INTER COMPANY HOLDINGS
When one company is holding shares in another company or when

shares are mutually held, the accounting treatment becomes more
complicated and can be discussed under three heads: (1) when the
purchasing company holds shares in the vendor company, (2) when the
32
vendor company holds shares in the purchasing company and (3) when
shares are mutually held.
2.5.1 When the purchasing company holds shares in the vendor
company
If the purchasing company holds a certain percentage of shares in the
vendor company, the purchase consideration payable will be
proportionately reduced. For example, if A. Ltd. acquires the business of
B.Ltd. at an agreed value of Rs.3,00,000 and if A.Ltd. is holding 20% of
the shares of B.Ltd. then the payable purchase consideration would be
only Rs.2,40,000 since 1/5 of Rs.3,00,000 already belongs to the
purchasing company.
a) Entry in the books of the vendor company

Sundry Shareholders A/c Dr.
To Purchasing Company’s A/c (for the amount by which
P.C. is reduced)
b) Treatment in the books of the purchasing company
The entry for taking over the assets and liabilities will be made in the
books of the purchasing company as usual, but the Investment Account
representing the cost of shares in the vendor company should be closed.
Illustration 5
With a view to expanding business and also effecting economies, Bright

Light Ltd. was absorbed by Sun Light Ltd. The assets and liabilities of
the two companies are given below:
Bright Light Ltd.: Cash Rs.5,000; investment Rs.10,000; reserves

Rs.10,000; debentures Rs.60,000; machinery Rs.70,000; Book debts
Rs.45,000; creditors Rs.30,000; workmen compensation reserve
Rs.10,000; goodwill Rs.20,000; stock Rs.10,000.
Sun Light Ltd.: Capital Rs.40,000; investment Rs.10,000; reserves
Rs.25,000; debentures Rs.50,000; machinery Rs.60,000; book debts
Rs.10,000; creditors Rs.20,000; workmen compensation fund Rs.5,000;
cash Rs.2,000.
You are told that the capital of Bright Light Ltd. consists of Rs.100
shares, Rs.50 called-up and that of Sun Light Ltd. Rs.100 shares Rs.40
called-up. It was agreed that the shareholders of Bright Light Ltd. were
to be issued such number of new Rs.1 shares of Sun Light Ltd. at their
intrinsic value as would equal the intrinsic value of the Bright Light Ltd.
33
shares. The debtors of Sun Light Ltd. include Rs.5,000 due by Bright
Light Ltd. and the investments include Rs.5,000 paid-up value of shares
in Bright Light Ltd. The stocks of Bright Light Ltd. include Rs.2,000 worth
of stock bought from Sun Light Ltd. invoiced at 10% profit on the sale
price by Sun Light Ltd. Give the Journal entries in the books of both the
companies and also the Balance Sheet of Sun Light Ltd. after
amalgamation.
Solution:
(1) The Balance Sheet of Bright Light Ltd. is prepared to find out its
share capital (not given in the problem).
Balance Sheet of Bright Light Ltd.

Share Capital: 1,000 Goodwill 20,000
shares of Rs.100 each; Machinery 70,000
Rs.50 each, called up Investments 10,000
(balancing figure) 50,000 Stock 10,000
Reserves 10,000 Debtors 45,000
Workmen Compensation Cash 5,000
Reserve 10,000
Debentures 60,000
Creditors 30,000
1,60,000 1,60,000
2) Intrinsic value of shares in Bright Light Ltd.

Total assets 1,60,000
Less: Liabilities
Debentures Rs.60,000
Creditors Rs.30,000 90,000
Net Assets 70,000
Therefore, Intrinsic value of one shares = 70,000 = Rs.70

1,000
3) The Balance Sheet of Sun Light Ltd. is prepared to find out the
book value of goodwill (not given).
Balance Sheet of Sun Light Ltd.
Share Capital: 1,000 Goodwill (Balancing fig.) 53,000
34
shares of Rs.100 each Machinery 60,000
Called-up Rs.40 40,000 Investments :
Reserve 25,000 1,000 shares in Bright
Add: Increase in Light Ltd. 7,000
value of shares in Other investment 5,000 12,000
Bright Light Ltd. 2,000 27,000 Stock 5,000
Workmen’s compensation Book debts 10,000
Fund 5,000 Cash 2,000
Debentures 50,000
Creditors 20,000
1,42,000 1,42,000
4) Intrinsic value of shares in Sun Light Ltd.

Total Assets Rs. 1,42,000
Less: Liabilities
Debentures Rs. 50,000
Creditors Rs. 20,000 Rs. 70,000
Net Assets Rs. 72,000
Therefore, Intrinsic value per shares = 72,000 = Rs.72

1,000
5) Calculation of purchasing consideration payable:
Total number of shares of Bright Light Ltd. 1,000

Less: Shares already held by Sun Light Ltd. 100
Therefore Shares held by outsiders 900
Intrinsic value of 900 shares = 900 x 70 Rs. 63,000

(Purchase consideration payable to outsiders)
No. of shares to be given by Sun Light Ltd.
63,000
in settlement = = 875 shares
72
Purchase consideration = 875 shares of Rs.100 each, Rs.40 paid-up,

valued at Rs.72 each.
Bright Light Ltd.
JOURNAL
Particulars Rs. Rs.

35
To Goodwill A/c 20,000
To Machinery A/c 70,000
To Investment A/c 10,000
To Stock 10,000
To Debtors 45,000
To Cash 5,000
(Being the assets closed)
Debentures A/c Dr. 60,000
(Being the liabilities closed)
Sun Light Ltd. A/c (1,000x 70) Dr. 70,000
(Being the total purchase consideration
due)
Share in Sun Light Ltd. A/c Dr. 63,000
To Sun Light Ltd. A/c 63,000
(Being the purchase consideration
received)
Share Capital A/c Dr. 50,000
Reserve A/c Dr. 10,000
Workmen Compensation Reserve A/c Dr. 10,000
To Shareholders A/c 70,000
To Shares in Sun Light Ltd. 63,000
(Being the shares allotted to the outside
shareholders)
To Sun Light Ltd. 7,000
(Being the Shareholders A/c closed since
not payable)
Realisation Account
To Goodwill 20,000 By Debentures 60,000
To Machinery 70,000 By Creditors 30,000
To Investments 10,000 By Sun Light Ltd. 70,000
36
To Stock 10,000
To Debtors 45,000
To Cash 5,000
1,60,000 1,60,000
Sundry Shareholders Account
To Shares in Sun Light 63,000 By Share Capital 50,000

Ltd.
To Sun Light Ltd. By Reserves 10,000
(amount cancelled) 7,000 By Workmen compe-
nsation reserve 10,000
70,000 70,000
Sun Light Ltd.

JOURNAL
Particulars Rs. Rs.
Investment A/c Dr. 2,000
To Reserves 2,000
(Being the shares in Bright Light Ltd.
revalued)
Machinery A/c Dr. 70,000

Investment A/c Dr. 10,000
Stock A/c Dr. 9,800
(Rs.10,000-less 10% on Rs.2,000)

Cash A/c Dr. 5,000
37
To Debentures A/c 60,000
To Creditors A/c 30,000
To Investments A/c 7,000
To Liquidators of Bright Light Ltd. 63,000
(Being the assets and liabilities taken
over and investments in Bright Light Ltd.
cancelled)
Liquidators of Bright Light Ltd. Dr. 63,000

To Equity share capital (875 x 40) 35,000
To Share Premium A/c (875 x 32) 28,000
(Being the allotment of 875 shares in full

settlement)
Sundry Creditors A/c Dr. 5,000

To Sundry Debtors A/c 5,000
(Being the cancellation of inter-company
Owings)
Balance Sheet of Sun Light Ltd.

(After amalgamation)
Share Capital: Goodwill 73,200
1,875 shares of Rs.100 Machinery 1,30,000
each, Rs.40 paid-up 75,000 Investments 15,000
Reserve 27,000 Stock 14,800
Workmen Compen.reser. 5,000 Debtors 50,000
Share premium A/c 28,000 Cash 7,000
Debentures 1,10,000
Creditors 45,000
38
2,90,000 2,90,000
2.5.2 When the vendor company holds shares in purchasing

company
In this case, when the assets of the vendor company are taken over by
the purchasing company, the latter company cannot purchase its own
shares. The shares already held by the vendor company will be
deducted from the shares to be given by the purchasing company to the
vendor company. The shares already held by vendor company will be
treated as part payment of the purchase consideration and will be
available for distribution among its shareholders for final settlement.
If for example, X Ltd. holding 1,000 shares in Y Ltd. is absorbed by Y

Ltd. and the purchase consideration is the allotment of 2 shares of Y Ltd.
for every three shares of X Ltd. the total number of shares in X Ltd. is
24,000.
The number of shares to be issued by Y Ltd. will be:
15,000 shares (24,000 / 3x2 = 16,000 less 1,000 shares already held by
X Ltd.)
The shares in the Purchasing company held by the vendor company will
not be transferred to the Realisation Account as it is available for
distribution among the shareholders. The vendor company will revalue
the shares in the purchasing company, any profit or loss being
transferred to the Realisation Account.
2.5.3 When shares are mutually held
If shares are mutually held, the value of shares of one company
depends upon the value of the shares of the other company and hence
can be found out only by an algebraical equation, as shown in the
illustration given below:
Illustration 6
The following are the Balance Sheet of Major Ltd. and Minor Ltd. as on
31st March, 2000:
Liabilities Major Minor Assets Major Minor
Ltd. Rs. Ltd. Rs. Ltd. Rs. Ltd. Rs.
Issued, Subscribed Fixed Assets:
& paid-up Capital: Machinery 1,00,000 50,000
Equity shares of Furniture 20,000 5,000
Rs.100 each Investments:
fully paid 2,00,000 1,00,000 Shares in Minor 25,000 --
39
Reserve & Surplus Share in Major -- 12,000
Profit & Loss A/c 60,000 30,000 Current Assets:
Current Liabilities Stock 75,000 45,000
& provisions: Debtors 60,000 68,000
Sundry Creditors 40,000 70,000 Cash at Bank 20,000 20,000
3,00,000 2,00,000 3,00,000 2,00,000
Major Ltd. holds 200 shares in Minor Ltd. and Minor Ltd. holds 100
shares in Major Ltd.
The two companies agree on amalgamation on the following basis:
1) A new company is to be formed called Hind Ltd.

2) The Goodwill is valued for Major Ltd. Rs.50,000 and for Minor
Ltd. Rs.25,000.
3) The shares of Hind Ltd. are of nominal value of Rs.10 each.
Prepare:
1) Balance Sheet of Hind Ltd. resulting from the merger.
2) Schedule showing fully the shareholdings therein attributable to
shareholders of Major Ltd. and Minor Ltd. All costs of
amalgamation are to be ignored.
Solution:
Hind Limited
Balance Sheet as on 31st March 2000 (1)
Share Capital Fixed Assets:
Issued, subscribed & Goodwill 75,000
paid up Capital: Machinery 1,50,000
42,800 shares of Furniture 25,000
Rs.10 each fully paid 4,28,000 Current Assets:
(Issued for consideration Stock in Trade 1,20,000
other than cash) Sundry Debtors 1,28,000
Current liabilities & Prov- Cash at Bank 40,000
Isions : sundry creditors 1,10,000
5,38,000 5,38,000
40
Working Note:
(i) Value of Net Assets of Major Ltd. and Minor Ltd. as on 31st March
2000:
Particulars Major Ltd. Minor Ltd.

Rs. Rs.
Goodwill 50,000 25,000
Machinery 1,00,000 50,000
Furniture 20,000 5,000
Stock 75,000 45,000
Debtors 60,000 68,000
Cash at Bank 20,000 20,000
3,25,000 2,13,000
Less: Sundry Creditors 40,000 70,000
2,85,000 1,43,000
(ii) Value of shares of Major Ltd. is Rs.2,85,000 plus 1/5 of the value of
Minor Ltd. Similarly value of shares of Minor Ltd. is Rs.1,43,000 plus
1/20 of the value of Major Ltd. Assuming value of Major = a and Minor =
b.
a = 2,85,000 + 1/5 b
b = 1,43,000 + 1/20 a
= 2,85,000 + 1/5 (1,43,000 + 1/20 a)
a = 3,13,600 + 1/100 a
a = 3,16,768
b = 1,43,000 + 1/20 a
b = 1,43,000 + 1/20 (3,16,768)

b = 1,43,000 + 15,838
b = 1,58,838
(2) Value of outsiders Interest in Major Ltd. & Minor Ltd.
41
Particulars Major Ltd. Minor Ltd.
Rs. Rs.
Valuation vide working note (ii) 3,16,768 1,58,838
Less: Internal investments
1/20 held by Minor
1/5 held by Major 15,838 31,768
Value of Outsiders Interest 3,00,930 1,27,070
No. of shares issued 30,093 12,707
4,28,000
LET US SUM UP
Both in absorption, and external reconstruction one or more companies
are liquidated, and their business are purchased by some other
company. Hence in both the above cases the approach is common and
the accounting treatment is similar. The purchase consideration may be
calculated by various methods, viz., Net Assets Method, Net Payment
Method, Lump Sum Method, and Intrinsic Value Method.
The books of liquidating company (vendor company) are to be closed by
transferring all the assets and liabilities to the realization account at book
values. The realization account is credited with the purchase
consideration received from the purchasing company. The purchasing
company may settle the purchase consideration in the form of cash,
shares and debentures, which will be distributed among the
shareholders to settle their account.
In the books of new company (purchasing company) incorporating
entries are passed to incorporate the assets and liabilities at revised
values. But due considerations are to be given for treating inter company
Owings and intercompany holdings.
GLOSSARY
Absorption : Taking over of the business of one or more

companies by a company already in
existence.
External : An existing company goes into liquidation

for the express purpose of selling its
42
Reconstruction business to a newly formed company.
Incorporating Entry : The first entry passed in the books of

purchasing company to incorporate the
assets and liabilities taken over in its
books.
CHECK YOUR PROGRESS

1. When an existing company takes over the business of one or more
existing companies, it is called
a) amalgamation b) absorption
c) external reconstruction d) internal reconstruction
2. Accumulated losses in the vendor company should be transferred to
__________
a) equity share holders’ account
b) debenture holders’ account
c) preference share holders’ account
3. Cost of liquidation of vendor company agreed to be paid by
purchasing company is debited to ______in the books of purchasing
company
a) profit and loss a/c b) goodwill or capital reserve a/c
c) equity share holder’s a/c d) none of the above
4. Calculating purchasing consideration by adding the agreed value of
assets taken over by the purchasing company minus value of
liabilities to be assumed, is _________ method of calculating
purchase consideration
a) net payment method b) net worth method
c) lump sum method d) none of the above
5. External reconstruction means _________
a) reduction of capital
b) alteration of capital
c) forming a new company to acquire an existing company
6. When there are one or more liquidations and no formation, it is
known as _________
a) Amalgamation b) Absorption
c) External Reconstruction d) None of the above
7. As per AS-14 purchase consideration is what is payable to ______
a) share holders
43
b) share holders and debenture holders
c) shareholders and creditors
d) debentures holders and creditors
SUGGESTED READINGS
4. Pillai R.S.N. Bagavathi and Uma .S (2010), Fundamentals of
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
Reconstruction|Video-1 Corporate Accounting-IITamil - Bing
video
2. Key Differences between Amalgamation and Absorption of
Companies| Video-2|Corporate Accounting-II BR - Bing video
3. Amalgamation|Corporate Accounting|Part 1 in Tamil|
#amalgamation|#absorption|#externalreconstruction - Bing video
1. b) 2. a) 3. b) 4. b) 5. c)
6. b) 7. a)
44
UNIT 3
INTERNAL RECONSTRUCTION
STRUCTURE
Overview
Learning Objectives
3.1 Introduction
3.2 Methods of Reconstruction

3.2.1 External Reconstruction
3.2.2 Internal Reconstruction
3.3 Alteration of Share Capital

3.3.1 Accounting Entries for Alteration of Share Capital
3.4 Reduction of Share Capital
3.4.1 Accounting Entries for Reduction of Share Capital

3.4.2 Reorganisation through surrender of shares
Let us sum up
Check your progress

Glossary
Suggested readings
OVERVIEW
Reconstruction is usually an alternative to winding up to give a further
chance. The company must have turned the corner. The difficult period
should be over and there should be fair profits, and the company may
want to distribute dividends without waiting for past losses being made
up. The sacrifice of each group is the basis for the Reconstruction.
Hence, there should be proper compensation with post-reconstruction
earnings.
LEARNING OBJECTIVES
• appreciate the need for reconstruction of a company.
• distinguish between internal reconstruction and external
reconstruction.
45
• explain the different modes of internal reconstruction.
• infer the accounting treatment of different adjustments and
prepare Balance Sheet after reconstruction.
3.1 INTRODUCTION
The term reconstruction means reorganizing the capital structure of a
company including the reconstruction of claims of both the shareholders
and the creditors against the company. It refers to an arrangement by
which a financially unsound and/or unprofitable and weak company is
strengthened by certain measures.
3.2 METHODS OF RECONSTRUCTION
Reconstruction may take two forms, viz., (i) External Reconstruction (ii)
Internal Reconstruction.
3.2.1 External Reconstruction
In such reconstruction, an existing weak company goes into liquidation
and a new company is formed to take over its business and run it under
a new name. Here one liquidation and one formation take place. The
Accounting entries in respect of this reconstruction has already been
discussed in pervious unit.
3.2.2 Internal Reconstruction
It refers to a reduction of capital in such a way that accumulated losses
are eliminated from the books of account and the capital shown in the
Balance Sheet is represented by true assets. No liquidation and no
formation take place. It includes both alteration and reduction of share
capital.
3.3 ALTERATION OF SHARE CAPITAL
The Company’s Act has used the words, "Alteration Proper" for
alteration of share capital. Such alteration can be done under the
provisions of Sections 94 to 97 of the Companies Act. The term
alteration proper includes the following:
i. Increase of share capital by issue of new shares.

ii. Consolidation or subdivision of the existing shares in shares of
larger or smaller denominations.
iii. Conversion of fully paid shares into stocks and vice-versa.
iv. Cancellation of the unissued shares.
A company can make these alterations by passing an ordinary
resolution, if it’s authorised by its Articles of Association to do so. Such
alteration must be notified, and a copy of the resolution should be filed
46
with the Registrar within 30 days of the date of the passing of such
resolution
3.3.1 Accounting Entries for Alteration of share capital
(a) Consolidation of shares
Here, shares of smaller denominations are converted into shares of
larger denominations. In such a case the paid-up share capital retains
the same, but the number of shares is reduced.
Example: A company having equity share capital of Rs. 1 lakh divided
into shares of Rs. 10 each decides to convert the share capital into
equity shares of Rs. 100 each.
The following journal entry will be passed for such conversion:
Equity Share Capital (Rs. 10) A/c Dr. 1,00,000

To Equity Share Capital (Rs. 100) A/c 1,00,000
(Being conversion of 10,000 equity shares
of Rs. 10 each into 1,000 shares of 100 each)
(b) Subdivision of shares
In this case, shares of larger denomination are converted into shares of
smaller denominations
Example: A company having equity share capital of Rs. 1 lakh divided
into shares of Rs. 100 each decides to convert it into shares of Rs. 10
each.
In such a case the journal entry will be as follows:
Equity Share Capital (Rs. 100) A/c Dr. 1,00,000
To Equity Share Capital (Rs.10) A/c 1,00,000

(Being conversion of 1,000 shares of
Rs.100 each into 10,000 equity shares of
Rs. 10 each)
(c) Conversion of shares into stock
A company can convert its fully paid-up shares into stock or vice-versa.
In case shares are converted into stock, the following journal entry will
be passed:
Share Capital A/c Dr.
To Capital Stock A/c
47
(d) Cancellation of unissued Capital
In case a company cancels its unissued shares, it does not require any
accounting entry to be passed. The authorized share capital of the
company will be reduced by the amount of unissued shares now
cancelled.
3.4 REDUCTION OF SHARE CAPITAL
A company can reduce its share capital as per the provisions of Sections
100 to 105 of the Companies Act. The term reduction of share capital
includes the following:
(i) Writing off lost capital.
(ii) Refunding surplus paid-up capital.
(iii) Reducing liability of the members for uncalled capital.
A company can reduce its share capital only when each of the following
conditions is satisfied:
(i) The Articles of Association of the company permits such a
reduction.
(ii) The company passed a special resolution for reducing its share
capital.
(iii) The company obtains the confirmation of the court in respect of
such a reduction.
In order to get the confirmation of the court, the company has to file a
scheme of reconstruction with the court.
Reduction of capital will not be effective until a copy of the resolution and
sanction of the court is filed and registered with the Registrar of joint
stock companies. The court may, at its discretion order the words “and
reduced” to be added to the name of the company for the period it
prescribes. The court may also require the company to publish the
reasons for reduction of capital for the information of the public.
3.4.1 Accounting Entries for Reduction of Share Capital
(a) Reducing liability of members for uncalled capital

In case the liability of members in respect of the uncalled share capital is
reduced, the paid-up value of the share capital will remain unchanged.
However, the members will stand to gain since they will not have to pay
money to the company to the extent of uncalled capital cancelled.
Example: A company has share capital of Rs.1 lakh divided into shares
of Rs.10 each called and paid-up Rs.6 each. The company decides to
48
cancel the liability of members to the extent of the Rs.2 per share, thus
making the shares of Rs.8 each, Rs.6 paid-up.
The following journal entry will be passed in such a case:
Share Capital (Rs. 10) A/c Dr. 60,000
To Share Capital (Rs.8) Ac 60,000
(Being conversion of shares of Rs.10
each into shares of Rs.8 each)
(b) Refunding surplus paid-up capital
In case a company finds that it has more capital than what it can
profitably use, it may decide to refund surplus capital to its
shareholders.
Example: A company has share capital of Rs.1 lakh divided into shares
of Rs.10 each. The company decides to repay its members Rs.2 per
share and make shares as of Rs.8 each fully paid-up.
The following journal entries will be passed in such a case:
(i) Share Capital (Rs.10) A/c Dr. 1,00,000
To Share Capital (Rs.8) A/c 80,000
To Sundry Members A/c 20,000
(For conversion of share capital and money due to members)
(ii) Sundry Members A/c Dr. 20,000

To Bank a/c 20,000
(For Payment of money to members)
(c) Reducing the paid –up capital

i. When the capital of the company not represented by the assets,
the capital reduction program is a remedy. This is carried out by
reducing the capital and using it for erasing the losses appearing
on the asset side of the balance sheet. The entry being.
Share capital a/c Dr

To capital Reduction a/c
ii. If it is thought that losses have reached to such an extent that a

portion of borrowed capital was lost, then the following entry is
necessary.
Debentures a/c Dr.
Creditors a/c Dr
49
To Cap.reduction a/c
iii. Now losses can be written off with the help of this new account
called “Capital Reduction Account”.
Capital Reduction a/c Dr.
To Preliminary expenses a/c
To profit and Loss a/c
To Goodwill a/c
To discount a/c
To S. Assets a/c
For better understanding, you can refer the following illustrations.
Illustration 1:
The balance sheet of X Ltd.is. follows
Issued share capital: Goodwill 10,000
10,000 equity shares of 1,00,000 Other fixed assets 90,000
Rs.10 each fully paid up Stock in trade 25,000
10000, 7% pre.shares of
1,00,000 S.Debtors 30,000
Rs.10 each
Profit and Loss a/c 45000
2,00,000 2,00,000
It was resolved that equity shares of Rs.10 each be reduced to fully paid
shares of Rs.6 each and 7% preference shares of Rs.10 each be
reduced to 7 ½ % fully paid preference shares of Rs.7each. number of
shares in each case remained the same. It was further resolved that the
amount so available be used for writing off the debit balances of profit
and loss account, goodwill account completely and other fixed assets as
far as possible. There were arrears of preference dividend for the last
three years and it was decided that they be cancelled. You are required
to make journal entries and prepare the revised balance sheet.
50
Solution:
Journal of X Ltd
Rs. Rs.
7% Preference share capital a/c Dr. 1,00,000
To 7½% Preference share capital a/c 70,000
To Capital reduction a/c 30,000
Rs.10 Equity share capital a/c Dr. 1,00,000
To Rs.6. Equity share capital a/c 60,000
To Capital reduction a/c 40,000
Capital reduction a/c Dr. 70,000
To Profit and Loss a/c 45,000
To Goodwill a/c 10,000
To Fixed assets (balancing figure) a/c 15,000
X LTD (AND REDUCED)

BALANCE SHEET
Issued Share Capital Other fixed assets 90,000
10,000 Equity shares of Rs.10 60,000 Less Written off by 15,000 75,000
each fully paid, reduced by the the order of court
order of court of Rs.6 each fully
paid
10,000 7% Preference shares 70,000 Stock in trade 25,000

of Rs.10 each fully paid
reduced by the order of court Debtors 30,000
to 7 ½ % preference shares of
Rs.7. each fully paid
Goodwill 10,000 Nil

Less : Written off by 10,000
the order of court
Profit and Loss 45,000 Nil

Less : Written off by 45,000
the order of court
1,30,000 1,30,000
51
Note: The explanation regarding the reduction of assets and capitals
need be given in the balances sheet only when court requires it. In the
absence of any such order the net amount of assets and capitals (after
reduction) be given in the balance sheet.
Illustration 2:
Balance Sheet of Indian Construction Ltd.., as on December
31,2018

Authorised Capital: Goodwill 10,000
20,000 equity shares of Land and buildings 20,500
Rs.10 each 2,00,000 Machinery 50,850
Issued, Subscribed and Preliminary
1,500
Paid up capital: expenses
12,000 equity shares of
Rs.10 each Stock 10,275
1,20,000
Less: Calls in arrears Book debt 15,000
(Rs.3 per share on
3,000 shares) 1,11,000 Cash at Bank 1,500
9,000
Sundry creditors Profit and Loss A/c

15,425
Provision for taxes 4,000 Balance as per last
Balance sheet
22,000
Less :Profit for the
20,800
year 1,200
1,30,425 1,30,425
A valuation of machinery reveals that it is over-valued by Rs.10,000. It is

proposed to write down this asset to its true value, to eliminate the
deficiency in the Profit and Loss Account and to write off goodwill and
preliminary expenses by adopting the following course:
(1) Forfeit the shares on which call is outstanding.
(2) Reduce the paid-up capital by Rs.3 per share; face value
remaining the same.
(3) Reissue the forfeited shares at Rs. 5 per share.
(4) Utilize the provision for taxes if necessary.
52
All the above were duty put into action. Pass necessary Journal entries
and draw up the Balance sheet of the Company after carrying out the
terms of the scheme.
Solution:
Journal
Dr. Cr.
Particulars
Rs. Rs
Equity share capital A/c. Dr 30,000
To Calls in Arrears A/c 9,000
To Shares Forfeited A/c 21,000
(Being the forfeiture of 3,000 shares on which Rs.3 per share
is in arrear)
Equity shares Capital A/c Dr. Dr. 27,000
To Capital Reduction A/c 27,000
(Being the reduction of Rs. 3 per share on the equity shares
A/c)
Bank A/c Dr. Dr. 15,000
Shares Forfeited A/c Dr. 6,000
To Equity shares Capital A/c 21,000
(Being the reissue of 3,000 shares credited as Rs.7)
Shares Forfeited A/c Dr. 15,000
To Capital Reduction A/c 15,000
(Being the profit on forfeiture and reissue transferred to capital
reduction A/c)
Provision for taxes A/c. Dr 300
To Capital reduction A/c 300
(Being the balance amount required for reconstruction
transferred)
Capital Reduction A/c Dr. 42,300
To Profit and loss A/c 20,800
To Goodwill 10,000
To Preliminary expenses 1,500
To Machinery A/c 10,000
(Being the losses written off and machinery reduced)
Capital Reduction Account

Rs. Rs.
By Equity share
To P and L A/c 20,800 27,000
capital
By Shares forfeited
To Goodwill 10,000 15,000
A/c
By Provision for
To Preliminary expenses 1,500 300
taxes
42,300 42,300
53
Balance Sheet of Indian Construction Ltd., as on December 31, 2018
Authorised capital: Land and buildings 20,500
20,000 shares of Rs. 10 Machinery(50,850 -
2,00,000 40,850
each 10,000)
Issued and Paid-up-capital: Stock 10,275
12,000 shares of Rs. 7
84,000 Book debts 15,000
each
Sundry creditors 15,425 Cash at Bank 16,500
Pro. for taxes 3,700
1,03,125 1,03,125
3.4.2 Reorganization through surrender of shares

Under this method shares are sub-divided into shares of smaller
denominations and shareholders are made to surrender a part of them
to facilitate capital reorganization. Such surrendered shares are usually
utilized to reduce or extinguish debenture and trade liabilities. The
amount of shares surrendered not reissued, and the claim foregone by
debenture holders and creditors are transferred to capital reorganization
account, which will be utilized to write off losses, etc.
Illustration 3:
The balance sheet of A Ltd as at 31st December, 2001 is as follows:

Authorised and issued
Fixed assets 14,30,000
capital:
8,000 shares of Rs.100
8,00,000 Stock-in-trade 80,000
each
6% Debentures 14,00,000 Debtors 30,000
Accrued interest on the
70,000 Investments 17,000
above
Trade creditors 4,50,000 Cash 1,03,000
Income –tax due 10,000 Profit and Loss a/c 10,70,000
27,30,000 27,30,000
The following scheme of reorganization was approved and confirmed by

the court:
(1) Each share shall be sub-divided into twenty fully paid equity
shares of Rs.5 each.
54
(2) After sub-division, each shareholder shall surrender to the
company 95% of his holding, for the purpose of re-issue to
debenture-holders and creditors so far as required, and
otherwise for cancellation.
(3) Of these surrendered 46,000 shares of Rs.5 each shall be
converted into 8% participating preference shares of Rs.5 each
fully paid.
(4) Debenture holders’ total claim to be reduced to Rs.2,30,000. This
will be satisfied by the issue to them of 46,000 participating
preference shares of Rs.5 each fully paid.
(5) The liability for income –tax is to be satisfied in full.
(6) The claims of unsecured creditors shall be reduced by 80% and
the balance shall be satisfied by allotting them equity shares of
Rs. 5 each fully paid from the shares surrendered.
(7) Shares surrendered and not issued shall be cancelled.
Journalise the various entries to be made, assuming that the tax liability
is not paid.
Solution:
Particulars Rs. Rs
Equity share capital A/c. (Rs.100) Dr 8,00,000
To Equity share capital account (Rs.5) 8,00,000
Equity shares Capital A/c Dr. Dr.7,60,000
To surrendered shares A/c 7,60,000
Surrendered share A/c Dr. Dr.2,30,000
To 8% preference share capital account A/c 2,30,000
Surrendered shares A/c Dr. 4,40,000

6% Debentures a/c Dr. 14,00,000
Accrued interest a/c Dr. 70,000
Sundry creditors a/c Dr. 4,50,000
To Capital reduction A/c 23,60,000
Capital reduction account Dr. 23,60,000
To Profit and Loss account 10,70,000
To Capital reserve 12,90,000
A Ltd. Balance sheet

As on ….
Share Capital: Fixed assets 14,30,000
46,000 preference shares
2,30,000 Investments 17,000
of Rs. 5 each
55
1,30,000 Current assets:
Rs.5 each
Reserve and Surplus: Stock-in-trade 80,000
Capital reserve 12,90,000 Debtors 30,000
Secured loans …… Cash 1,03,000
Unsecured loans ……
Current liabilities and
Provisions:
Income-tax 10,000
16,60,000 16,60,000
LET US SUM UP
Reconstruction refers to an arrangement by which a financially unsound
and/or unprofitable and weak company is strengthened by certain
measures. It may take two forms viz, external and internal. In external
reconstruction, existing weak company goes into liquidation and a new
company is formed to take over the business of existing company. But in
internal reconstruction no liquidation takes place. It is considered by just
reducing the claim of shareholders and creditors against the company. A
new account, called 'Capital Reduction A/c is opened and credited with
the amount of reduction, which in turn used to write off the accumulated
losses and excess portion of sundry assets. A company can reduce its
share capital only after obtaining the confirmation of the court. The court
may, at its discretion, order the words “and reduced” to be added with
the name of the company for the period it prescribes.
CHECK YOUR PROGRESS

1. The accumulated losses under scheme of internal reconstruction are
written off against:
a) Realisation A/c b)Share Capital A/c
c)Capital Reduction Account d)None of the above
2. A contingent liability, not provided for, if does not materialized is
credited to:
a) Capital reduction account b) Profit and Loss A/c
c)Share holders A/c d)None of the above
3. The balance in the capital reduction account after writing off
accumulated losses is transferred to:
a) General reserve b)Share Capital
c)Capital Reserve d) None of the above
4. Reduction of share capital requires the permission of:
a) The Central Government b)Court
56
c)SEBI d) None of the above
5. In a scheme of reorganization amount of shares surrendered by
shareholders is transferred to ____________
a) Capital reduction account b) Share surrendered account
c)Capital reorganization A/c d) Capital reserve account
6. Consent of the creditors is required for
a) Sub dividing the shares b) Consolidation of shares
c)Increasing share capital d) return of capital
7. Capital reduction account is used in the case of
a) Internal reconstruction
b) external reconstruction
c)amalgamation of companies
d)absorption of one company by another
GLOSSARY
Capital reduction : Represents the sacrifice made by different

Account parties i.e., shareholders, debenture
holders, creditors etc.
Internal Reconstruction : A reconstruction involving reorganization

of the capital structure of a company
without its liquidation
External reconstruction : A reconstruction that involves liquidation of

a company.
SUGGESTED READINGS

New Delhi.
Pearson, New Delhi.
57
WEB RESOURCES
1. Corporate Accounting I Internal Reconstruction of Companies I
Introduction Theory I Khans Commerce T - YouTube
2. Alteration of share capital and Internal Reconstruction | Part 1 in
Tamil |#alterationofsharecapital - Bing video
Reconstruction|Video-1 Corporate Accounting-IITamil - Bing
video
ANSWER TO CHECK YOUR ANSWER
1. c) 2. d) 3. c) 4. b) 5. b)
6. d) 7. a)
58
UNIT 4
BUY BACK OF SHARES

STRUCTURE
Overview
Learning Objectives
4.1 Buy back of shares – Meaning
4.2 Reasons for Buy- back of shares

4.3 Conditions of buy back
4.4 Accounting requirements of buy back
4.5 Accounting entries in buy back of shares
4.6 Advantages of buy back of shares
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
Buy back of shares essentially means, repurchase of its own shares by
a company. These buy back must be as per SEBI Guidelines. It would
result in reduction of capital. Hence, the Act has lot of restrictions on
reduction of share capital, as it would affect the interest of the creditors.
This unit covers all the legal formalities and condition of buy back in
detail.
LEARNING OBJECTIVES
• discuss the reasons for buy back of shares
• assess legal requirements for buy back.
• explain the sources of funds for buy back as per companies act.
• pass accounting entries in buy back of shares.
59
4.1 BUY-BACK OF SHARES – MEANING
The buyback of shares was not allowed in India till 1998. Only in 1998,
union government promulgated the companies (amendment) ordinance
1998, there by allowed the companies in India to buy back their own
shares. These amendments inserted two new sections, i.e., 77 A and
77B in the Companies Act 1956. These sections laid own the provisions
and restrictions relating to buy back of shares. Buy back means,
repurchase by a company of its own shares. This may be done at par or
premium or discount. The par value of the shares purchased is reduced
from the equity capital. If it is done with premium, the excess amount
paid debited to reserve or surplus. If purchased at discount, the discount
amount is transferred to capital reserve.
4.2 REASONS FOR BUY BACK OF SHARES
a) Buy back of shares facilitates management to manage their
surplus cash. This will shift the responsibilities of paying tax from
companies to shareholders i.e. if dividend is paid, companies will
have to pay dividend tax on the distribution. If cash returned to
shareholders, through buy-back, shareholders have to pay
capital gain tax.
b) It will increase the value of shares. Since buy back shares
reduces number of equity shares, it would enhance the share
value.
c) Buy back helps a company to achieve an optimum debt-equity
ratio.
d) Buy back shares, may lead to treasury operation, i.e. buying
when the prices are low, and reissue at attractive prices. But in
India it is not allowed, as share bought will have to be
extinguished.
e) A cash rich company is often the target of hostile takeover bid.
Such a bid can be avoided through buy back of shares.
4.3 CONDITIONS OF BUY BACK
The following are the necessary conditions for buy-back under the Indian
Company Law:
1. Buy-back should be authorized by Articles. If Articles are silent,
they will have to be amended.
2. A company should pass a special resolution in a general meeting
authorizing the buy-back.
3. The buy-back does not exceed 25% of the paid-up capital and
free reserves of the company concerned.
60
4. The debt-equity (including free reserves) ratio is not more than
2:1 after such buy-back.
5. All shares and other specified securities are fully paid-up. Partly
paid-up shares or securities cannot be bought back by the
company.
6. Buy-back must be completed within 12 months from the date of
special resolution.
7. The securities bought back should be physically destroyed within
7 days from completion of buy-back. Because for this there can
be no treasury operations with buy-back. As the shares are to be
extinguished, they cannot be resold.
8. A company can buy-back from any of the following:
(a) From existing shareholders on a proportionate basis
(b) From open market
(c) From holders having odd lots. Shares in odd lots cannot be
traded in the market and
(d) From employees to whom shares have been earlier offered
under ESOPs (employees stock option schemes) or sweat
equity.
9. After completion of buy-back, a company cannot issue same kind
of share or security for a period of 24 months.
10. Money borrowed from banks/financial institutions cannot be
utilized for the purpose of buy-back.
11. A company which has defaulted in repaying fixed deposits or the
interest there on, or redemption of debentures or preference
shares, payment of dividend or repayment of term loans is not
permitted to buy-back.
12. A company defaulting in filing of annual returns, preparation of
annual accounts or whose accounts do not reflect a true and fair
view is also not permitted to buy-back its shares.
4.4 ACCOUNTING REQUIREMENTS OF BUY BACK
A company can purchase its shares from out of (i) free reserves, (ii)
securities premium account or (iii) proceeds of any shares or specified
securities. However, buy-back cannot be effected from the proceeds of
any shares or specified securities issued earlier. Free reserves are
defined as those, which are free for distribution as dividend.
If the buy-back is from free reserves a sum equal to nominal value of the
shares purchased should be transferred to Capital Redemption Reserve
Account (CRR). To the extent of the nominal value of the shares bought
back paid-up share capital will be reduced and correspondingly there will
61
be an increase in the Capital Redemption Reserve Account. Transfer to
CRR account is made mandatory by the Act only when redemption is
effected from out of free reserves. Such a transfer is also necessary
when redemption is carried from out of ‘securities premium account’.
The CRR account is on par with paid-up share capital for the purpose of
reduction of paid-up capital. However, CRR account can be utilized for
the purpose of issue of bonus shares.
The nominal value of the share bought back is debited to share capital
account. If such buy-back is at premium, such premium should be
debited to free reserves/securities premium account. On the other hand,
if the purchase is at discount, the discount will be credited to capital
reserve. Any expenses incurred will be debited as buy-back expense
and they are treated as business expenses. The following accounting
entries will explain the position.
4.5 ACCOUNTING ENTRIES IN BUY BACK OF SHARES

Transaction Account to be
Debited Credited
Nominal value of the shares bought Share Capital Bank
back
Premium paid on buy-back Free Reserve Bank
/ Securities
Premium
Discount on buy-back Share Capital Capital
Reserve
Redemption from out of free reserves Free CRR Account
Reserves
Expenses on buy-back Buy-back Bank
Expenses
Illustration 4.1
Below is given the balance sheet of Kuber Ltd. as at March 31, 2000.
(Rs. in
Crores)
Share Capital – Authorised 100
Subscribed: Equity share of Rs.10 100
each
Reserves & Surplus
Capital Reserves 15
Securities Premium 25
62
Revenue Reserves 260 300
400
Fixed Assets 100
Less Provision for depreciation 100 Nil
Investments (market value Rs.400 100
crores)
Current Assets 340
Less Current Liabilities 40 300
400
The company bought back 50 lakh equity shares of Rs.10 each at Rs.50
per share, in view of huge cash balances. You are required to give the
necessary journal entries and also show the balance sheet after buy-
back.
Solution
In the Journal of Kuber Ltd.
Debit Credit
(Rupees)
(Rupees)
Equity Shares Capital A/c Dr. 5
Revenue Reserves Dr. 20
To Bank A/c 25
(Being the buy-back of 50,00,000 equity
shares of Rs.10 each a t Rs.50 per share)
Revenue Reserves Dr. 5
To Capital Redemption Reserve A/c 5
(Being the transfer of nominal value of
shares bought back to capital redemption
reserve account)
Balance Sheet of Kuber Ltd. (after buy-back)
(Rs. in
Crores)
Share Capital – Authorised 100
Subscribed: Equity share of Rs.10 95

each
Reserves & Surplus
Capital Reserves 15
63
Securities Premium 25
Revenue Reserves 235
Capital Redemption Reserve 5 280
375
Fixed assets less depreciation Nil
Investments (market value Rs.400 100

crores)
Current Assets 315
Less Current Liabilities 40 275
375
4.6 ADVANTAGES OF BUYBACK OF SHARES

1. Companies having large amount of free reserves are free to use
funds to acquire shares and other specified securities under the
buyback process.
2. Buyback of shares is helpful to a company to reduce its share
capital which is bloated (i.e. excessive wealth) unnecessarily for the
time being. Unused and excessive share capital is reduced to give
more benefits to the shareholders by trimming the capital structure.
3. Buyback of shares results in lower capital base, enhances post-
buyback earning per share and appreciates considerably the price-
earnings ratio.
4. After buyback of shares the companies will have the advantages of
servicing a reduced capital base with higher dividend yield.
5. Buyback of shares is allowed under section 68 of the Companies
Act, 2013 if the liquid position of the company is good. Companies
which have defaulted in repayment of deposits, redemption of
debentures or preference shares or repayment of term loans or
interest payable thereon from banks and financial institution are not
allowed buyback of shares. It is a good check on the companies.
6. Buyback provides capital appreciation to investors which may
otherwise be not available.
7. Buyback gives a signal to the market that shares are undervalued.
8. Buyback of shares helps promoters to formulate an effective
defence strategy against hostile takeover bids.
64
Buyback may have some disadvantages also like manipulation of share
prices by promoters, speculation etc.
LET US SUM UP
Buy back of shares essentially means repurchase of its own shares by a
company, as per SEBI guidelines. A company may purchase its own
shares out of its free reserve or the securities premium. Since it results
in reduction of capital, a lot of restrictions laid down by the act.
CHECK YOUR PROGRESS
1. The buy back of shares must be authorized by
a) Article of association
b) Memorandum of association
c) Board of directors
2. The buy back must be completed within _____ months from the date
of passing special resolution
a) 6 b) 9 c) 12 d) 3
3. The buy back of shares must not exceed _______% of the total paid
up capital and free reserve
a) 10% b) 25%
c) 15% d) None of the above
4. The debit equity ratio is not more than ______ after such buy-back
a) 2 : 1 b) 1 : 1
c) 3 : 1 d) None of the above
5. The buy back of shares may be done
a) at par b) at premium
c) at discount d) all the above
GLOSSARY
Buy-back of shares : It means repurchase by a company of its

own shares, which will result in reduction
of equity capital.
Capital redemption : It the buy back of shares is from free

reserve reserves, a sum equal to nominal value of
the shares repurchased should be
transferred to this account.
Employees stock : It is an extension of the idea of profit

option scheme sharing by the employees. Under this
65
scheme, an employee is given the option
to buy shares at less than the market
price.
SUGGESTED READINGS
1. Arulanandam, M.A., and Raman K.S. (2009), Advanced Accounting,
Himalaya Publishing House, Mumbai.
3. Jain, S.P. and Narang, K.L. (2014), Advanced Accountancy, Kalyani
Publisher, Ludhiana.
Advanced Accounting, S.Chand & Company Private Limited, New
Delhi.
5. Rajasekaran. V and Lalitha, R. (2011), Advanced Accounts,
Pearson, New Delhi.
WEB RESOURCES
1. Company accounts part 12 in Tamil || Issue of shares at
Premium || Pro-rata allotment of shares - YouTube
2. #1 Buy Back of Shares - Concept - B.COM / CMA / CA INTER -
By Saheb Academy - Bing video
3. #2 Buy Back of Shares - Journal Entries - B.COM / CMA / CA
INTER - By Saheb Academy - Bing video
1. a) 2.c) 3.b) 4.a) 5.d)
66
BLOCK 2
HOLDING AND LIQUIDATION ACCOUNTS
UNIT 5 :ACCOUNTS OF HOLDING COMPANIES –

INTRODUCTION
UNIT 6 : ACCOUNTS OF HOLDING COMPANIES –
CONSOLIDATED FINANCIAL STATEMENTS
UNIT 7 : LIQUIDATION- STATEMENT IS AFFAIRS AND

SURPLUS / DEFICIENCY ACCOUNT
UNIT 8 : LIQUIDATOR’S FINAL STATEMENT OF
ACCOUNTS
67
UNIT 5
ACCOUNTS OF HOLDING COMPANIES –
INTRODUCTION
STRUCTURE
Overview
Learning Objectives
5.1 Introduction
5.2 Meaning of holding company and subsidiary company
5.3 Legal requirements regarding statement of Accounts

5.4 Wholly owned and partly owned subsidiaries
5.5 Advantages of holding companies
5.6 Disadvantages of holding companies

5.7 Consolidated balance sheet and profit and loss account
Let us sum up
Check your progress

Glossary
Suggested readings
OVERVIEW
The development of joint stock companies has taken place almost in all
countries of the world, mainly due to the special features of
transferability of shares and separate legal entity. For controlling a
company, you need not purchase its assets and liabilities. It is enough to
purchase its shares in the stock exchange. A holding company is able to
exercise control over the management of other companies by virtue of
its share ownership. As per Indian Accounting Standard AS.21, A parent
is an enterprise that has one or more subsidiaries.
LEARNING OBJECTIVES
• explain the concept of holding company

• distinguish between wholly – owned and partly- owned
subsidiaries.
68
• evaluate the legal requirements regarding statement of
accounts.
• enumerate advantages and disadvantage of holding companies.
5.1 INTRODUCTION
There are different ways by which one company can gain control over
other companies.
One way is to acquire all the assets and liabilities of the companies
concerned thereby securing control by ownership of such asset and
liabilities. This arrangement is termed as absorption. In this case, the
acquired company will go into liquidation.
Another way is to acquire all or the majority (50% and above) of the
voting shares of these companies. The company acquiring the shares is
known as the holding company; the company whose shares have been
acquired is known as subsidiary company of the holding company.
The advantages of acquiring control through this method are two-folds-
financial and managerial. Financially, it is a favourite device. A holding
company can control large properties of a subsidiary with a minimum of
investment, and it can avail of income tax benefits. Managerially, it is
possible to decentralize operations with full responsibility and
accountability to the subsidiary.
5.2 MEANING OF HOLDING COMPANY AND SUBSIDIARY
COMPANY
Definition:
Section 4 of the Companies Act, 1956 defines a Holding Company and

Subsidiary Company by their relation to each other.
According to this Section, a company shall be deemed to be a
Subsidiary Company of another if, and only if:
a) That other company controls the composition of the Board of
Directors.
b) That other company holds more than half of the nominal value of
its equity share capital; or
c) That the company is a Subsidiary of any company which is a
Subsidiary of other company.
“A company shall be deemed to be a Holding company of another if and
only if, that the other is Subsidiary”. Thus, a Holding Company is one
which has acquired control over one or more other companies.
69
5.3 LEGAL REQUIREMENTS REGARDING STATEMENT OF
ACCOUNTS
According to Schedule VI of the companies Act, 1956, some items
regarding its subsidiaries are to be separately stated in the Balance
Sheet of the holding company. Under Section 212, the following
documents or statement in respect of each subsidiary company should
be attached to the Balance Sheet of the holding company:
i) A copy of the Balance Sheet of the subsidiary.
ii) A copy of its Profit and Loss Account.
iii) A copy of the Report of Board of Directors.
iv) A copy of the Auditor’s Report.
v) A Statement of interest and profit of holding company in the
subsidiary.
5.4 WHOLLY OWNED AND PARTLY OWNED SUBSIDIARIES
A wholly owned subsidiary company is one in which all the shares with
voting rights of 100% are owned by the holding company whereas in a
partly owned subsidiary, only the majority of shares (i.e. more than 50%)
are owned by the holding company. In a wholly owned subsidiary, there
is no non-controlling interest because all the shares with voting rights
are held by the holding company. On the other hand, in a partly owned
subsidiary company, there is a non-controlling interest because less
than 50% shares with voting rights are held by outsiders other than the
holding company.
Section 19 of Indian Companies Act 2013 Profits a subsidiary company
from holding shares in the holding company. But it may continue as a
member of its holding company if it was a member thereof of the
commencement of the act or becoming a subsidiary company.
5.5 ADVANTAGES OF HOLDING COMPANIES
1) Subsidiary companies maintain their goodwill due to having
separate identities.
2) The fruits of monopoly or near monopoly may be enjoyed as the
public may not be aware of the existence of combination. Hence,
no resentment in the minds of the people.
3) The holding companies may require investing a comparatively
small amount in order to have control on the subsidiary’s
companies.
4) Subsidiary companies maintain their separate identities which
make it possible to carry forward losses for income tax purposes.
70
5) The financial position and profitability of each undertaking is
known as these companies have to prepare their own accounts.
6) It is easy to give up the control of the holding company simply by
disposing of the shares in the subsidiary companies.
7) Holding company may be able to secure economies in
production and management.
5.6 DISADVANTAGES OF HOLDING COMPANIES
Following are the main disadvantages of holding companies:
1. Fraudulent manipulation of accounts is possible especially if the
accounts of various companies are made up to different dates.
2. Intercompany transactions are often entered at unduly low prices
in order to suit the holding companies.
3. There is the danger of oppression of minority shareholders.
4. Accounting difficulties may arise in appraising the financial
position of companies due to inter-company transactions done on
too high or too low prices.
5. The true financial position of the subsidiary companies may not
be known to the shareholders of the holding company.
6. The creditors and outside shareholders may not be aware of the
true financial position of the subsidiary companies.
7. Officers or directors (of the choice of holding company) at undue
high remuneration may have to be appointed in the subsidiary
companies.
5.7 CONSOLIDATED BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT
In England, the holding company is required to present, in addition to its
normal Balance sheet, a consolidated Balance Sheet covering the
holding company and its subsidiaries and a consolidated Profit and Loss
Account. In India, the law does not compel a holding company to
prepare a consolidated Balance sheet and Profit and Loss Account. It is
only for convenience that these statements are prepared.
The purpose of a consolidated Balance Sheet and Profit and Loss
Account is to show the financial position and operating results of a group
consisting of a holding company and one or more subsidiaries. The
financial position and operating results, reported through the
consolidated statements, are portrayed from the standpoint of the
interest of the members of the holding company.
71
LET US SUM UP
A company can become a holding company of another company by
holding more than 50% of nominal value of the equity share capital of
another company or by holding the composition of Board of directors of
other company or by controlling a holding company, which controls
another company. Under section 212 of companies act, a copy of the
balance sheet and profit and loss account of the subsidiary company
should be attached to the balance sheet of the holding company.
CHECK YOUR PROGRESS
1. The parent organization acquiring controlling interest in another
company is called the _________ company
a) Subsidiary b) Holding
c) Government d) None of the above
2. A company has to acquire _________ shares of another company in
order to become a holding company
a) more than 50% of equity b) 100% of equity
c) 51% of preference d) none of the above
3. As per AS _______ of Indian Accounting Standard, a parent is an
enter prize that has one or more subsidiary companies
a) 20 b) 18 c) 21 d) none of the above
4. A company becomes the subsidiary of another if _____
a) That another company controls the composition of its board of
directors.
b) That another company holds more than half of the equity
capital.
c) The first mentioned company is a subsidiary of any company
which is subsidiary of another company
d) all the above
GLOSSARY
Holding company : A company which holds more than 50% of

nominal value of equity share capital of
another company.
Subsidiary company : A company is a subsidiary of another

company if the other company holds more
than half of the nominal value of its equity
share capital.
72
Partly owned : A subsidiary in which the holding company
company does not hold all the shares.
Consolidated : The balance sheet published by holding

balance sheet company, in which assets and liabilities of all
the subsidiaries are given along with its own
assets and liabilities.
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Holding Company and Subsidiary Company || Advanced
Accounting-2 || Md Azim - YouTube
2. Holding company || Part 1 in Tamil || #holdingcompany ||
#Corporate Accounting - Bing video
3. Holding Company Accounts Video Series Part-I Corporate
Accounting|Commerce Course|Tamil|Rajasekar|BR - Bing video
4. Holding company Accounts - corporate Accounting in tamil - Bing
video
1. b) 2.a) 3.c) 4.d)
73
UNIT 6
ACCOUNTS OF HOLDING COMPANIES –
CONSOLIDATED FINANCIAL
STATEMENTS
STRUCTURE
Overview
Learning Objectives
6.1 Consolidated financial statements – Introduction
6.2 Steps for the preparation of consolidated Balance sheet
6.2.1. Calculation of the ratio of holdings
6.2.2. Cancellation of investment and share capital
6.2.3. Minority Interest
6.2.4. Pre-acquisition or capital Profit and revenue profit
6.2.5. Cost of control/ Goodwill
6.2.6 Unrealised intercompany profit
6.2.7 Intercompany ownings
6.3 Revaluation of Assets and liabilities
6.4 Bonus shares
6.4.1 Bonus shares out of Preacquisition Profit
6.4.2 Bonus shares out of Post- acquisition Profit
6.5 Treatment of Dividend
6.6 Sale of shares
6.7 Treatment of Debentures
6.8 Consolidation of Profit and loss account
Let us sum up
Check your progress
Glossaries
Suggested readings
OVERVIEW
A holding company, which presents consolidated financial statements
should also present in addition its separate financial statements.
Consolidated financial statements normally include consolidated balance
sheet, consolidated statement of profit and loss and notes, other
statements and explanatory material that form an integral part thereof.
74
As on today Companies Act does not require a holding company to
prepare consolidated financial statements.
LEARNING OBJECTIVES
• explain in preparing the consolidated financial statements for
holding company
• illustrate the inserting the Revaluation of Assets and liabilities in
the consolidated financial statements for holding company
• enumerate to prepare the consolidation of Profit and loss
account.
6.1 CONSOLIDATED FINANCIAL STATEMENT - INTRODUCTION
As already mentioned earlier a group comprises a parent and all its
subsidiaries. Consolidated financial statements are the financial
statements of the group presented as those of a single enterprise. This
is done by the parent company and the consolidated statements are
presented in addition to the separate financial statements of the parent.
The purpose of presenting in consolidated financial statements is to
provide the financial information about the economic activities of the
group. Such consolidated statements would show the economic
resources controlled by the group, the obligations of the group and the
results the group has achieved with its resources. Consolidated group
accounts provide the following benefits to users of financial statements
1) A shareholder in any one of the group companies is interested in
knowing as to how the group is faring as a whole. His or her
fortunes are tied with the success of the group as a whole. As
such consolidated statements provide a single document for the
stakeholders
2) Such consolidated accounts facilitate the valuation of shares of the
parent company.
3) The shareholders rightly want to know the return the parent
company is obtaining on its investment in the subsidiaries. This
can be done only with the help of consolidated accounts
4) Consolidated statements enable potential investors to take
appropriate decisions about investing in a parent company. The
decisions are bound to be better if based on the consolidated
statements of the parent rather than the separate statements.
6.2 STEPS FOR THE PREPARATION OF CONSOLIDATED
BALANCE SHEET
The following are important steps involved in the preparation of a
consolidated balance sheet.
75
6.2.1 Calculation of the Ratio of Holdings
First, we have to ascertain the number of shares of the subsidiary
company held by the holding company and by minority. Now calculate
the ratio of their respective holdings.
6.2.2. Cancellation of Investment and Share Capital
A consolidated balance sheet can be prepared by simply combining all
the assets and liabilities of the holding company and its subsidiary. It will
certainly balance, but it is not consolidated balance sheet. This is
because the intercompany balances have first to be eliminated. The
investment in subsidiary company" by the holding company should be
cancelled and replaced by the assets and liabilities of the subsidiary
company.
Example :-
Liabilities H Ltd. S Ltd. Assets H Ltd. S.Ltd.

Share capital 1,00,000 40,000 Fixed assets 60,000 40,000
(Equity shares of Investment –
40,000 -
Rs.10 each) shares in S.Ltd.
1,00,000 40,000 1,00,000 40,000
If the assets and liabilities of both the companies are combined, the
resultant balance sheet would look like as under.
The share capital of the subsidiary company and the investment in
shares of S Ltd. of holding company will not find a place in the
consolidated Balance Sheet and the Balance Sheet would appear as
under:
Fixed Assets (Rs. 60,000
Share Capital 1,00,000 1,00,000
+ Rs.40,000)
6.2.3 Minority Interest Calculation

When some of the shares in the subsidiary are held by outside
shareholders, they will be entitled to a proportionate share in the assets
and liabilities of that company. For example, if 20% of the shares in the
subsidiary are held by outsiders, then they are entitled to 20% of the
assets and liabilities of the subsidiary and the balance 80% belongs to
the holding company. The share of the outsiders in the subsidiary is
called minority interest. In the consolidated Balance Sheet, all the assets
and liabilities of the subsidiary are consolidated with the assets and
liabilities of the holding company and the minority interest representing
the interest of the outsiders in the subsidiary is known as a liability.
The minority interest is calculated as follows:
76
Rs.
Paid – up value of the shares held by outsides ………………
Add : Proportionate share in the company’s profits and ……………..
reserves
Add: Proportionate share in the increase in the value of …………....
the assets of the subsidiary
Less : Proportionate share in the losses of the
subsidiary, if any
Less: Proportionate share in the decrease in the value ……….
of assets of the subsidiary
Minority internet ………….
If preference shares are held by the outsiders, the face value of such
shares with the dividend due thereon (if there are profits) will be included
in the minority interest. If the subsidiary company does not have any
profit and the preference shares are cumulative, then the dividend due
will be shown by way of a note. The proportionate share of the outsiders
in the profits or losses will be calculated only with reference to the equity
shares held by them since the profits and reserves, if any, belong only to
the equity shareholders.
6.2.4 Pre Acquisition or Capital Profit and Revenue Profit
The profits of the subsidiary may be divided into Capital Profit and
Revenue Profit. Profits existing in or earned by the subsidiary company
upto the date of acquisition of shares by the holding company are
Capital Profits or (pre-acquisition profits) and the holding company's
share of the same is to be calculated and shown separately under the
heading ‘Capital Reserve’ or adjusted against the Cost of Control. The
profits earned by the subsidiary after the purchase of shares by the
holding company are Revenue Profits (or post-acquisition profits) and
the holding company's share of it is to be added to the profits of the
holding company. The share in the capital profit and revenue profit of the
minority shareholders are added to the minority interest.
Any increase in the value of fixed assets of the subsidiary company
whether before or after the date of acquisition will also be treated as
Capital Profit and if there is reduction in the value of fixed assets as on
the date of acquisition, it must be treated as Capital Loss and deducted
from the Capital Profits. But If the fall in the value of the asset occurs
after the date of acquisition, the loss is treated as on ordinary revenue
loss.
6.2.5 Cost of control / goodwill
If the holding company purchases the shares of the subsidiary at a price
above the face value, the excess paid represents payment for Cost of
77
Control or Goodwill. This amount of goodwill must further be increased
by the holding company's share in the Capital Loss or be reduced by the
Capital Profits. If the price paid for the purchase of shares is less than
the paid-up value, the remaining difference is the capital Reserve. Cost
of control appears as an asset in the consolidated Balance Sheet The
cost of control/capital reserve will be calculated as below.
Rs.
Amount paid for the purchase of 40,000 7,80,000
shares of the subsidiary
Less: Face value of the shares acquired 4,00,000
Holding company’s share in Cap.profit 3,20,000 7,20,000
Cost of control 60,000
6.2.6 Unrealised Intercompany profits
An unrealised intercompany profit exists where one company still holds,
at the date of consolidation, stock sold to it by the other company at a
profit. Whilst all authorities agree that some elimination of such profit
should be made but, not all adopt the same view as to the extent of the
elimination where a minority interest is involved. It is considered by
some that the whole of such unrealised profit should be eliminated by
creating a Stock Reserve Others are of opinion that the holding
company's share of profit alone should be eliminated since for the
minority shareholders the profit is nothing but a realised profit.
For example, a subsidiary company sells to the holding company goods
of the value of Rs 30,000 on which the subsidiary, has put a profit of
20% on selling price and the entire goods remain unsold on the date of
consolidation Supposing the holding company holds. 3,000 shares of the
subsidiary's 4,000 shares, the stock reserve would be:
a) 30,000x1/5x3/4 =Rs.4,500(only to the extent of the holding
company’s share; or
b) 30,000x 1/5 = Rs.6,000. (on a very conservative basis).
The modern practice is to create the whole of the unrealized profit as
stock reserve without adjusting the share of the minority shareholder.
The stock Reserve is created whether the goods are sold by the holding
company to the subsidiary or vice versa, at a profit. The amount of
unrealized profit (Stock Reserve) is deducted from the stock on the
asset side and also from the profit and loss account on the liability side
of the consolidated Balance sheet. Thus, stock will be shown at its true
cost and the Profit and Loss account will show only realized profit.
78
6.2.7 Inter Company Owings
Mutual indebtedness between the holding company and its subsidiary
may be merged in a Sundry Debtors and Creditors Account or in
separate Current Accounts. These accounts be set off and eliminated
from the consolidated balance sheet (both from the total debtors and
total creditors) since it is meant to show the position of the group as
against the outside world. But the two balances may not be the same
due to some amount in transit which should be shown separately
Similarly, there may be mutual acceptances in terms of bills receivable
and bills payable as at the consolidation. The acceptances held within
the group as on the date of the Balance Sheet are to be set off. But the
bills discounted or endorsed are not to be eliminated as they now
represent claims of the outsiders as against the group. Similarly,
debentures issued by one company and held by the other should also be
eliminated from both sides - from debentures on the liability side and
from investments on the assets side.
Solved Problems
Illustration 1
H Ltd. acquires ¾ of the share capital of S.Ltd. on 31December 2003
when the balance sheets of the two companies are as under:
Balance Sheet As on 31st December 2003
Liabilities H. S Assets H S
Share capital (in
20,000 10,000 Fixed Assets 20,000 10,000
Rs.10 shares)
General Reserve 5,000 3,000 Current Assets 13,000 12,000
Profit and Loss A/c 3,000 2,000 Shares in S 10,000
10 %Debentures 10,000 5,000
Sundry Creditors 5,000 2,000
43,000 22,000 43,000 22,000
You are required to prepare the consolidated balance sheet as on 31

December, 2003,
Solution:
Consolidated Balance Sheet
as on 31st December 2003
Share capital (in Rs.10
20,000 Fixed Assets :
shares)
General Reserve 5,000 H 20,000
S 10,000 30,000
Capital Reserve 1,250 Current Assets:
79
Profit and Loss A/c 3,000 H 13,000
10 per cent S 12,000 25,000
Debentures:
H 10,000
S 5,000 15,000
Sundry Creditors:
H 5,000
S 2,000 7,000
Minority Interest 3,750
55,000 55,000
Working Notes:
Rs. Rs.
(i)Cost of Control:
Amount paid for shared in S Ltd. 10,000
Less: Paid up value of shares 7,500
Share of General Reserve (3/4) 2,250
Share of Profit and Loss
Account Balance (3/4) 1,500 11,250
Capitals Reserve 1,250
(ii) Minority Interest
Paid up value of shares 2,500
Share of General Reserve (1/4) 750
Share of Profit and Loss Account (1/4) 500
Illustration 2
The following are the Balance Sheets of Sun Ltd., and Moon Ltd as on
December 31, 2001.
Balance Sheets
Sun Rs. Moon

Liabilities Moon Rs Assets Sun Rs
Rs
Share capital: Fixed Assets 1,95,000 70,000
Shares of Rs.10 2,00,000 50,000 Investments:

Share in
Reserve 50,000 20,000 60,000 -
Moon Ltd.
P&L A/c balance
30,000 7,500 Debtors 35,000 25,000
(1.1.2001)
Other
Profit for the year
50,000 20,000 current 60,000 12,500
2001
assets
Creditors 20,000 10,000
3,50,000 1,07,500 3,50,000 1,07,500
80
Notes:
1. Sun Ltd. Purchased on July 1, 2001, 4,000 shares in Moon Ltd.
at Rs.15 each.
2. Stock in Moon Ltd. includes Rs.7,500 worth of goods purchased
from Sun Ltd. which company sells goods at 25% above cost.
3. Creditors of Moon Ltd. include Rs.5,000 due to sun Ltd.
Prepare a consolidated Balance sheet as on December31,2001.
Solution:
Rs.
a)Capital Profit:
General Reserve 20,000
Profit and Loss A/c Balance as on January 1, 2001 7,500
Profit upto June 30, 2001 10,000
37,500
Holding company’s share 37,500 x 4/5= 30,000
Minority interest 37,500 x 1/5 =7,500
b)Revenue Profit Rs.10,000(profit after July 1, 1998)
Holding company’s shares 10,000x4/5 =8,000
Minority interest 10,000x1/5=2,000
c)Minority interest
1/5 of the Share capital

10,000
1/5 of the Capital profit
7,500
1/5 of the Revenue Profit
2,000
19,500
d)Cost of control/ Capital Reserve:
Amount paid for the purchase of shares

60,000
Less: Face vale of the shares held 40,000
Holding company’s share of capital profit 30,000

70,000
Capital Reserve
10,000
e)Stock Reserve 7,500 x 1/5= 1,500
81
Consolidated Balance Sheet of Sun Ltd. and its subsidiary
Moon Ltd as on December 31, 2001.
Liabilities Rs Assets Rs
Share capital: Fixed Assets : 10,000
Shares of Rs.10 each 2,00,000 Sun Ltd. 1,95,000
General Reserve 50,000 Moon Ltd. 70,000 2,65,000
Capital Reserve 10,000 Debtors:
Profit and Loss A/c 30,000 Sun Ltd. 35,000
Add: Sun Ltd – Profit 50,000 Moon Ltd. 25,000
Moon Ltd – Profit 8,000 60,000
88,000
Less : Inter-
Less : Stock Reserve 1,500 86,500 55,000
Com.owings 5,000
Other Current
Creditors:
Assets:
Sun Ltd. 20,000 Sun Ltd. 60,000
Moon Ltd. 10,000 Moon Ltd. 12,500
30,000 72,500
Less: Inter-company
Owings. 5,000 25,000 Less :Stock
Monitory interest 19,500 Reserve 1,500 71,000
3,91,000 3,91,000
6.3 REVALUATION OF ASSETS AND LIABILITIES

If at the time of acquisition of shares, the assets and liabilities of the
subsidiary are revalued for determining the value of the shares, the profit
or loss on such revaluation is Capital Profit or loss. The holding
company's share out of such Capital Profit is either put to Capital
Reserve or deducted from the Cost of Control (goodwill) and vice versa
in the case of loss on revaluation. The minority shareholders’ share is
added to minority interest. Profit at the end of the year will be charged
with the depreciation on the revised values in case the value of fixed
assets appreciates, and excess depreciation will be credited back to the
profit, in case the value of assets depreciates.
Illustration 3
The summarized Balance sheets of Honey Ltd. and Moon Ltd. as on
December 31, 2018, were as follows:
Honey Moon Honey Ltd. Moon
Ltd. Rs. Ltd. Rs. Rs. Ltd. Rs.
82
Capital: Plant 1,20,000 54,700
2,500 equity shares

2,50,000 - Premises 75,000 90,000
of Rs.100 each
Investments
1,000 equity shares
- 1,00,000 in Moon Ltd. 1,70,000 -
of Rs.100 each
at cost
Capital reserve - 60,000 Stock 70,000 18,000
General Reserve 1,20,000 - Debtors 21,000 20,000
Amount
Profit & Loss A/c 28,600 18,000 owing by 1,000 -
Moon Ltd.
Bank overdraft 50,000 - Bank 7,250 4,000
Bills
receivable
Bills payable
including
including Rs.1,500 to - 4,200 7,900
Rs.1,500
Honey Ltd.
from Moon
Ltd.
Creditors 23,550 -
Honey Ltd. - 500
Others - 4,000
4,72,150 1,86,700 4,72,150 1,86,700
Honey Ltd. acquired 800 equity shares of Rs.100 each in Moon Ltd. on
April, 2018. Prepare a consolidated Balance sheet as on December 31,
2018 showing your workings.
a) Sundry creditors of Honey Ltd. include Rs.6,000 due to Moon
Ltd.
b) The directors are advised that the premises of Moon Ltd. are
undervalued by Rs.10,000 and its plant overvalued by Rs.5,000.
c) A cheque for Rs. 500 sent to Honey Ltd., by Moon Ltd.., on
December30, 2018 was not received by the former until January
3, 2019.
Solution
Rs.
a)Capital Profit:
Capital Reserve 60,000
Profit for 3 months up to 31.3.2018 4,500
Increase in value of premises 10,000
74,500
83
Less: Decrease in value of plant 5,000
Capital Profit 69,500
Holding company’s share 69,500 x 4/5= 55,600
Minority interest 69,500 x 1/5 =13,900
b)Revenue Profit: 18,000x3/4=13,500
(Profit for 9 months from April 1 to Dec.31)
Holding company’s shares 13,500x4/5 =10,800
Minority interest 13,000x1/5 =2,700
c)Minority interest
1/5 of the Share capital Rs. 20,000
1/5 of the capital profit Rs. 13, 900
1/5 of the Revenue Profit Rs. 2,700
Minority Interest Rs. 36,600
d)Cost of control/ Capital Reserve:
Amount paid for the purchase of shares

1,70,000
Less: Face value of the shares
Purchased 80,000
Holding company’s share of capital profit 55,600

1,35,600
Goodwill/ cost of control

34,400
Consolidated Balance Sheet of Honey Ltd. and its Subsidiary Moon

Ltd. as on December 31, 2018
Liabilities Rs Assets Rs
Share Capital: Goodwill/ Cost of control 34,400
2,50,000 Plant:
Rs.100 each
General Reserve 1,20,000 Honey Ltd. 1,20,000
Profit & loss A/c 28,600 Moon Ltd. 54,700
Add: Revenue Profit
Less: Redu. 5,000 49,700 1,69,700
From Moon Ltd. 10,800 39,400
Bank overdraft 50,000 Premises
Bills payable 2,700 Honey Ltd. 75,000
84
Creditors:
Honey ltd. 23,550 Moon Ltd. 90,000
Less: Due to Moon
Add: Increase.10,000 1,00,000 1,75,000
Ltd. 6,000
17,550 Stock:
Moon ltd. 4,000 21,550 Honey Ltd . 70,000
Minority interest 36,600 Moon Ltd. 18,000 88,000
Debtors:
Honey Ltd. 21,000
Moon Ltd. 20,000
Less: Due
from
Honey Ltd. 6,000 14,000 35,000
Bank:
Honey Ltd. 7,250
Moon Ltd. 4,000 11,250
Cheque in transit 500
Bill receivable 6,400
5,20,250 5,20,250
6.4 BONUS SHARES

Treatment of issue of bonus shares by the subsidiary will depend upon
the source from which bonus shares are issued. Bonus shares may be
issued out of pre-acquisition profits or reserves or post-acquisition profits
or reserves.
6.4.1 Issue of bonus shares out of pre-acquisition profits:
In this case, there will be effect on the consolidated balance sheet

because while calculating the cost of control, the holding company’s
share in the pre-acquisition profit is reduced (because of capitalization of
profit) while on the other hand, paid –up value of shares held increases.
So the cost of control or goodwill will remain the same as it was before
the issue of bonus shares.
Illustration 4
S. Ltd. has a capital of Rs.2,00,000 on shares of Rs.100 each out of
which H.Ltd. Purchased 75% of the shares at Rs.2,40,000. The profits of
S.Ltd. at the time of purchase of shares by H. Ltd. were Rs.1,10,000.
S.Ltd. decided to make a bonus issue out of pre- acquisition profit of one
share for every five shares held. Calculate the cost of control of
acquiring shares of S.Ltd. (a) before the issue of bonus shares and (b)
after the issue of bonus shares.
85
Solution
Rs.
a) Calculation of cost of control before the issue
of bonus shares:
Amount paid for the purchases of shares 2,40,000
Less: Face value of 1,500(75%)
shares held 1,50,000
Holding company’s share of
pre-acquisition profit (1,10,000x ¾) 82,500 2,32,500
b) Calculation of cost of control after the issue of

bonus shares:
Amount paid for the purchase of shares 2,40,000
Less: Face value of shares(1,500) acquired 1,50,000
Face value of bonus shares(300) received 30,000
Holding company’s share of capital
Profit:
Profit and Loss A/c balance 1,10,000
Less: Bonus shares issued 40,000
70,000
Holding company’s shares (70,000 x ¾) 52,500

2,32,500
Cost of Control
7,500
6.4.2 Issue of Bonus Shares out of Post-acquisition Profits
The issue of bonus shares out of the revenue profit will have the effect of
reducing the holding company’s share in the revenue profit of the
subsidiary while increasing the paid-up value of shares held by the
holding company (because of bonus issue) on the other hand. This will
have the effect of reducing the cost of control or increasing the capital
reserve, as the case may be.
Illustration 5
Balance Sheet
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital: Sundry Assets: 6,00,000 3,00,000
Share of Rs.100 5,00,000 2,00,000 1,500 shares in 2,40,000 -
86
each S.Ltd.
Reserves 1,40,000 50,000
Profits 1,00,000 30,000
Creditors 1,00,000 20,000
8,40,000 3,00,000 8,40,000 3,00,000
S. Ltd. had a credit balance of Rs.10,000 in the Reserves when H.Ltd.
acquired shares in it. S.Ltd. made a bonus issue of one share for every
five shares held, all out of the post-acquisition profits. Calculate the cost
of control before and after the bonus issue and prepare the consolidated
Balance Sheet.
Solution:
Rs.
a) Cost of control before the issue of bonus shares:
Amount paid for the shares 2,40,000
Less: Face value of shares held 1,50,000
Holding company’s share of Capital Profit
(10,000 x ¾) 7,500 1,57,500
Cost of Control 82,500
Cost of control after the bonus issue:
Cost of the shares 2,40,000
Less: Face values of the share held 1,50,000
Bonus shares received (300 shares) 30,000
Holding company’s share of capital profit 7,500 1,87,500
b) Revenue profit
General Reserve 50,000
Less: Balance on the date of acquisition 10,000 40,000
Profit and Loss Account 30,000
70,000
Less: Bonus issue 40,000
Balance after bonus issue 30,000
Holding company’s share = 30,000 x ¾ = 22,500
Minority interest = 30,000 x ¼ =7,500
c)Minority interest:
¼ of shares held 50,000
¼ of bonus shares 10,000
¼ of Capital Profit 2,500
¼ of Revenue Profit 7,500
70,000
87
Consolidated Balance Sheet
Particulars Rs Particulars Rs
Share Capital 5,00,000 Cost of control 52,500
Reserve 1,40,000 Sundry Assets :

Profit & Loss A/c 1,00,000 H. Ltd 6,00,000
Add: Share in S.Ltd. 22,500 1,22,500 S.Ltd 3,00,000 9,00,000
Creditors:
H. Ltd. 1,00,000
S. Ltd 20,000 1,20,000
9,52,500 9,52,500
6.5 TREATMENT OF DIVIDEND

When dividend has been declared by the subsidiary company and the
holding company has received it, the treatment of the dividend will be as
follows:
(1) If the whole of the dividend is from pre-acquisition profits, it must be
credited to the Investment Account (representing cost of shares
acquired in the subsidiary) since the cash received is against the price
of the shares paid at the time of acquisition. This will reduce the cost of
shares to the holding company and thereby reduce the cost of control
or increase Capital Reserve.
(2) If the whole dividend is from the post-acquisition profits, it is to be
credited to the holding company's Profit and Loss Account and is
available for dividend to the shareholders.
(3) If the dividend paid, is both out of pre-acquisition and post-
acquisition
profits, the dividend received out of the pre-acquisition profit will be
credited to the Investments Account and that received out of post-
acquisition profit to Profit and Loss Account
(4) If it is not stated whether dividend has been declared out of pre-
acquisition or post-acquisition profits, it is assumed that dividend is out
of the profits for the year for which dividend is declared.
(5) If dividend has been declared out of pre-acquisition profits and if

that has been credited to the Profit and Loss Account instead of to the
Investment Account, it should be reversed by debiting the Profit and
Loss Account and crediting the Investments Account.
88
(6) If the dividend has simply been proposed by the subsidiary, the
holding company's share of it is added to its profit and shown as Profit
and Loss Account balance. The share due to minority shareholders
may be either shown as Proposed Dividend in the Balance Sheet or
added to the minority interest.
6.6 SALES OF SHARES
It holding company reduced its control by disposing of a part of its
investment in the subsidiary company, the accounting problem is not a
complicated one. The following guidelines are suggested:
(a) Calculate the sale price of shares sold and compare it with its
cost price. The difference, if any, is taken as profit or loss on
sale. if there is a loss it is debited to cost of control and if there is
a gain it can either be kept separate under the heading
investment fluctuation fund or can be used for reducing the cost
of control.
(b) Calculate minority interest and cost of control on the basis of
shares left unsold on the date of consolidation.
Following illustration gives the working.
Illustration 6
From the following balance sheet and information prepare a
consolidated balance sheet as on 31st December 2000.
Balance Sheet
as on 31st December, 2000
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Share capital Rs. 10
1,00,000 20,000 Sundry assets 93,000 32,000
each
Share in S: 1,200
Investment reserve 3,000 - 18,000
at cost
Profit and loss:
1 st Jan. 2000 6,000 7,200
Profit for the year 2,000 4,800
1,11,000 32,000 1,11,000 32,000
H bought 1,600 shares in S at Rs.15 per share when the profit and loss
account of the latter stood at Rs.4,400 and sold 400 of them on 30th
June 2000 at Rs.22.50 per share crediting the profit on sale to the
investment reserve account.
89
Solution
Rs.
a) Tutorial notes
(1) Calculation of profit

Sale price of 400 shares sold at Rs.22.50 per share 9,000
Less: cost price of shares at Rs.15 per share 6,000
Profit on sale transferred to investment fluctuation
account (already shown in the balance sheet) 3,000
(2) Calculation of cost of control:
This is to be calculated on the basis of existing number
of shares
Cost price of 1,200 shares at Rs.15 per share 18,000
Less Paid-up value of shares 12,000
6,000
1,200
Less share of capital profit, i.e.,  Rs.4,400
2,000 2,640
(3) Calculation of minority interest:
Number of shares held by outsides 800x Rs.10 8,000

Add Proportionate share of all existing reserves
800
 ( Rs.7,200 + Rs.4,800)
2,000 4,800
Minority interest 12,800
B) Consolidated Balance sheet
as on 31 st December, 2000
Rs. Rs.
Share capital 1,00,000 Cost of control 3,360
Investment fluctuation reserve 3,000 Sundry assets:

Minority interest 12,800 H 93 ,000
Profit and loss account: S 32,000 1,25,000
H company on 1 st Jan 6,000
During the year 2,000
Share from S Ltd. 4,560 12,560
1,28,360 1,28,360
90
6.7 TREATMENT OF DEBENTURES OF THE SUBSIDIARY
COMPANY
If the subsidiary company has issued debentures, they will be shown in
the consolidated Balance sheet as liability of the group. It is so if all
debentures are held by outsides. But if some debentures are held by the
holding company, they will be deducted at their paid-up value from
debentures of the subsidiary company and the balance will be shown as
liability of the group. Paid-up value of debentures held will be deducted
from the cost of the investments of the holding company and any excess
or less amount paid on debentures will be automatically adjusted in cost
of control or capital reserve as the price paid will be shown in the
investments of the holding company. The treatment will be the same if
debentures of the holding company are held by the subsidiary company.
6.8 CONSOLIDATION OF PROFIT AND LOSS ACCOUNTS

The following steps have to be taken to consolidate the profit and loss
accounts of the holding company and its subsidiary/ies.
1. Prepare consolidated profit and loss account in columnar form.
Draw on each side or column for each company, one column for
each adjustment and one for total.
2. All revenue items are to be added online by line basis.
3. From the consolidated revenue items inter-company transactions
like sales, fees, commission, royalty etc should be eliminated. A
holding company may sell goods to its subsidiary. The subsidiary
may be paying, royalty, consultation fees to the holding
company. These items you find on the revenue side of the
holding company and the expenses side of the subsidiary’s
income statement. It is also possible for the subsidiary to sell
goods to the holding company.
4. Inter – company transactions are eliminated in the total column
giving details in the adjustment column. For example, if S Ltd has
paid interest Rs.10,000 out of which Rs.5000 has been received
by H Ltd. the profit and loss account will appear as under for this
item assuming that H Ltd has received only this interest and paid
none.
91
H H S
S Ltd Adjust Total Adjust Total
Ltd Ltd. Ltd.
To By
- 10,000 5,000 5,000 5,000 - 5000 Nil
interest Interest
5. The profit and loss of each company is arrived at after eliminating

intercompany transactions.
6. After ascertaining the profit or loss of each subsidiary, the
following should be provided for,
a) The share of profit in the subsidiary due to minority
shareholders.
b) The amount of pre-acquisition profit in the subsidiary, which is
to be transferred to capital reserve.
c) Any unrealized profit in the stock of good, of any of the group
company is to be debited to the profit of the company., which
has sold the goods.
d) If any dividend has been received, from the pre-acquisition
profit and is credited to the profit and loss account of the
holding company the same is to be transferred to the
investment account. Items (a)and (b) should be debited to the
subsidiary as well as to the total column. Item (c) should be
debited to the company which has sold the goods (whether H
Ltd or S Ltd) as well as the total column. Item (d) should be
debited to the holding company as well as the total column.
7. After the above steps, the columns of H Ltd, S Ltd and total are
balanced to arrive at the profit or loss made by H Ltd, S Ltd and
the consolidated income which is shown by the total column.
Illustration 7
H Ltd. held three-fourths of the ordinary share capital of S Ltd. which it
acquired on 31st December 2000. The balance standing to the credit of
the profit and loss accounts of the respective companies on 31st
December 2000 were as under:
H Ltd S Ltd.
Net profit for 2000 3,600 2,400
Balance brought forward from the

6,000 7,200
previous year
9,600 9,600
92
On the date of acquisition, the profit and loss account of S Ltd. showed a
credit balance of Rs.2,400.
Prepare consolidated profit and loss account for the year ended 31st
December 2000.
Solution.
Consolidated Profit and Loss Account
for the year ending 31st December 2000
Rs. Rs.
Minority Interest 600 Net profit for 2000
Profit of 2000 (1/4) H Ltd 3,600

Profit of previous year 7,200 S Ltd 2,400 6,000
Profits of earlier years
Less; Pre-acquisition
remaining undistributed
profits 2,400 1,200 H Ltd 6,000
¼ of 4,800 4,800 S Ltd 7,200 13,200
Less: Pre-acquisition
Balance carried forward 15,000 10,800
Profit 2,400
16,800 16,800
From the consolidated profit and loss account pre-acquisition profits and
the share of minority are eliminated. Pre-acquisition profits are
eliminated because these would have been transferred from the profit
and loss account of the subsidiary to the cost of control account and
minority interest while constructing the consolidated balance sheet.
The previous illustration can also be shown in the form of a table given
below:
H Ltd. S Ltd. Total

Rs. Rs. Rs.
Final balance on profit and
9,600 9,600 19,200
loss a/c
Less: Minority interest in
- (-) 600 (-) 600
2000 profits
9,600 9,000 18,600
Less: Minority interest of
previous profits of S Ltd.
- (-)1,200 (-)1,200
excluding Pre-acquisition
profits
9,600 7,800 17,400
Less : Pre-acquisition profit - -2400 -2400
9600 5400 15000
93
LET SUM UP
A company can become a holding company of another company by
holding more than 50% of nominal value of the equity share Capital of
the other Company, or by holding the Composition of Board of directors
of other Company or by Controlling a holding Company which controls
another subsidiary. In India, law does not compel a holding company to
prepare a Consolidated Balance Sheet and Profit and Loss account. It is
only for convenience that these statements are prepared.
The main consideration is to be given for pre-acquisition and post-
acquisition profit of the subsidiary company as it is the basis for
calculating cost of control or capital reserve. In a partly owned
subsidiaries, the computation of minority interest is very important as it
represents the interest of minority shareholders in the net assets of the
company.
The mutual indebtedness between the holding and subsidiaries, are to

be set off and eliminated from the consolidated Balance Sheet. Likewise,
proper reserve is to be created towards unrealised inter company profits.
The Profit on revaluation of assets and liabilities at the time of
acquisition will be considered as capital profit.
CHECK YOUR PROGRESS
1. Profit arising on revaluation of assets of subsidiary company at the
time of acquisition of shares, is treated as _____ profits of the
holding company
a) capital
b) Revenue
c) deferred
2. Profits of the subsidiary company made after the date of purchase of
share by the holding company is treated as ______ profit.
a) Capital
b) Revenue
c) Deferred
3. Pre-acquisition profits are treated as ________ profit.
a) capital b) revenue
c) deferred d) none of the above
94
4. On 30th June 2001, two- thirds of the shares of S Ltd. (with a total
capital of Rs.6000) were acquired by H Ltd. The profit and loss a/c of
S ltd. showed a debit balance of Rs.3,000 on 1-1-2001 and a credit
balance of Rs.1,800 on 31-12-2001. The investment was purchased
for Rs. 4,500. The consolidated balance sheet should show _______
a) good will of Rs.900 b) capital reserve of Rs.900
c) good will of Rs.500 d) good will of Rs.1,100
5. With the same facts as in (4) the minority interest to be shown in the
balance sheet is
a) Rs. 2,000 b) Rs. 2,600
c) Rs. 2,800 d) Rs. 3,600
6. With the same facts as in (4) the revenue profits of S. Ltd. to be
shown in consolidated balance sheet are
a) Rs. 2,400 b) Rs.1,800
c) Rs.1,200 d) Rs.1,600
7. Dividends payable on December 31, 2001 are as follows:
Parent Company Rs. 2,00,000
100% owned subsidiary Rs. 60,000
The amount shown in CBS as dividends payable is:
a) Rs. 2,60,000 b) Rs. 60,000
c) Rs. 1,40,000 d) Rs. 2,00,000
8. S Ltd. has in stock goods worth Rs.10,000 supplied by its parent
company H Ltd. on which the latter made a profit of 20% on cost.
The controlling interest of H Ltd. in S Ltd. is 80%. This stock should
be shown in CBS at
a) Rs. 10,000 b) Rs. 8,000
c) Rs. 8,400 d) Rs. 7,500
GLOSSARY
Minority Interest : The interest of shareholders in the

subsidiary company other than the holding
company.
Partly owned Company : A subsidiary in which the holding company

does not hold all the shares.
: The profits earned by the subsidiary

company after the date of acquisition of
Post Acquisition Profit
shares by the holding company
95
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Holding Company Accounts|Video-5|Advanced Problem with
Solution|Adjustment|Easy Step|Tamil|Rajasekar - Bing video
2. Holding Company Accounts| Video-4| Problem & Solution in
Capital & Revenue Profits| Tamil|Rajasekar - YouTube
3. Holding Company in Tamil || Part 5 || Corporate Accounting ||
#holdingcompany - Bing video
1. a) 2.b) 3.a) 4.a) 5.b)
6. d) 7.d) 8.c)
96
UNIT 7
LIQUIDATION – STATEMENT OF
AFFAIRS AND SURPLUS / DEFICIENCY
ACCOUNT
STRUCTURE
Overview
Learning Objectives
7.1 Introduction
7.2 Modes of winding up or liquidation
7.3 Contributories
7.4 Order of payment
7.5 Preferential creditors
7.6 Interest on Liabilities
7.7 Statement of Affairs
7.7.1 Procedure of preparation of statement of affairs
7.7.2 List to be attached to the statement of affairs
7.8 Deficiency / Surplus account
Let us sum up
Check your progress

Glossary
Suggested readings

OVERVIEW
A joint stock company is an artificial person created by Law, with
perceptual succession. Though not necessary to end its life,
circumstances may force it to close its business. The liquidation is the
last stage in its life. It is the process whereby its life is ended, and its
property administered for the benefit of its creditors and members.
LEARNING OBJECTIVES
• infer the salient features of liquidation of limited companies.
97
• explain the concept of contributories and preferential
creditors.
• prepare the deficiency / surplus account to explain the
reasons for the deficiency / surplus.
7.1 INTRODUCTION
A company, being an artificial person, is created by law and effaced by
law. Once the certificate of incorporation is granted to a company, the
only remedy of closing it down is to liquidate it. Liquidation is a legal
procedure by which the corporate life of a company is brought to an end.
Any company, when found necessary, can be liquidated. It is not
necessary that only insolvent companies should be liquidated.
Sometimes, even solvent companies are liquidated.
7.2 MODES OF WINDING UP OR LIQUIDATION
The liquidation can take place in any of the following three ways:
(a) Compulsory winding up: This is also called winding up by the
court. It takes place when (i) company passes a special
resolution, or (ii) defaults in delivering the statutory report to the
Registrar or in holding the statutory meeting, or (iii) does not
commence business within a year from its incorporation or
suspends business for a year, or (iv) its membership falls below
seven (private company – two), or (v) is unable to pay its debt, or
(vi) it is just and equitable in the court’s opinion that the company
should be wound up.
(b) Voluntary winding-up: This can further be of two types,
members’ voluntary winding up and creditors’ voluntary winding
up. Members’ voluntary winding up takes place when a
declaration of the company’s solvency, verified by an affidavit, is
made by its directors. But when the declaration of solvency is not
made and delivered to the Registrar it is presumed that the
company is insolvent, and the winding up is called a creditors’
voluntary winding up.
(c) Winding-up subject to supervision of court: This mode of
winding-up is comparatively rare. It is a voluntary winding up with
the supervision of court. This order is made when court is
satisfied of the fact that the resolution for winding up was
obtained by influencing the minority holdings.
7.3 CONTRIBUTORIES
When winding up takes place shareholders are described as
‘contributories. The term ‘contributory’ means any person liable to
98
contribute to the assets of the company in the event of it being wound
up. It includes all present and all those past shareholders who have
ceased winding up. The contributories are classified into two lists – List
‘A’ includes the present shareholders (even those shareholders who
hold fully paid-up shares) and List ‘B’ includes the names of past
shareholders. In the event of winding up, the liquidator must adjust the
rights and interests of contributories. Where some classes of shares are
fully paid up and some are partly paid up, the liquidator, after having
paid creditors, must distribute the surplus, if any, first to those
shareholders who have paid in full to such an extent that they are
brought at par with those who have paid the amount partly.
7.4 ORDER OF PAYMENT

The proceeds of assets not specifically pledged with any creditor and the
surplus of assets specifically pledged, if any, is available to the various
claimants in the following order:
a) Legal charges,
b) Liquidator’s remuneration,
c) Cost and expenses of winding up,
d) Preferential creditors,
e) Creditors secured by floating charge, and
f) Unsecured creditors.
If still some surplus is left, it is distributed among contributories
(preference shareholders and equity shareholders) according to their
respective rights and interest.
7.5 PREFERENTIAL CREDITORS
The amount of preferential creditors is paid out of the proceeds of assets
not specifically pledged left after retaining the amount necessary for cost
and expenses of winding up but before making any payment to any
other unsecured creditors. Sec.530 of Companies Act states the
following as preferential creditors:
a) All revenues, taxes, cesses and rates due from the company to
Central or State Government or to local authority at the relevant
date and having become due and payable with the 12 months
next before that date:
b) All wages or salaries of any employee in respect of services
rendered to the company and due for a period not exceeding in
respect of services rendered to the company and due for a
period not exceeding four months within the twelve months next
before the relevant date, and any compensation payable to any
99
workman under any of the provisions of Chapter V A of the
Industrial Disputes Act, 1947 provided the amount payable to any
one claimant will not exceed Rs.20,000 w.e.f. March 1997.
c) All accrued holiday remuneration becoming payable to any
employee or in case of his death, to any other person in his right
on the termination of this employment before, or by the effect of,
the winding up order or resolution
d) Unless the company is being wound up voluntarily for
reconstruction or amalgamation with another company all
amounts due, in respect of contributions payable during the
twelve months next before the relevant date by the company as
the employer of any persons under the Employees State
insurance Act, 1948, or any other law.
e) All compensations due under the Workmen's Compensation Act,
1923 in respect of the death or disablement of any employee of
the company.
f) All sums due to an employee from a provident fund, pension
fund, gratuity fund or any other fund for the welfare of employees
maintained by the company.
g) The expenses of any investigation held in pursuance of Sec. 235
or 237, in so far as they are payable by the company.
7.6 INTEREST ON LIABILITIES
The date, up to which interest on loan, debenture, etc., is payable,
depends on the fact whether the company is solvent or insolvent. In
case the company is solvent interest is payable up to the date of actual
payment. If it is insolvent only upto the date of liquidation
7.7 STATEMENT OF AFFAIRS

Where the court has made a winding up order or appointed the official
liquidator as provisional liquidator, the officers and directors of the
company must submit, within 21 days of the court's order (or within such
extended time, not Exceeding 3 months, as the official liquidator or the
court may permit), a statement showing the following:
1. The assets of the company, stating separately the cash balance

in hand and at bank, if any, and the negotiable securities, if any,
held by the company.
2. Its debts and liabilities.
3. The names, residences and occupations of its creditors, stating
separately the amount of secured debts, particulars of the
securities given, whether by the company or its officers, their
value and the dates on which they were given.
100
4. The debts due to the company and the names, residences and
occupations of the persons from whom they are due and the
amount likely to be realized.
5. Such further or other information as may be prescribed by the
Central Government or as the official liquidator may require.
The Statement of Affairs is always open to inspection by any person.
7.7.1 Procedure of Preparation of Statement of Affairs
For the preparation of Statement of Affairs, the following points are
worth noting:
1. First of all, take all assets which are not specifically pledged. These
assets are taken at their realisable values and not at book values
because creditors for their payment are concerned with the
realizable values of the assets. It may be noted that calls in arrears
are also treated as an asset not specifically pledged to the extent of
estimated realisable amount, but uncalled capital is not shown as an
asset.
2. Add to the realisable value of the assets not specifically pledged,
any surplus from assets specifically pledged.
3. From the total as obtained by adding (1) and (2) first deduct the
amount of preferential creditors, the amount of creditors having a
floating charge (e.g., debentures) and the result will be surplus or
deficiency as regards debenture holders.
4. Deduct the amount of unsecured creditors from the figure as
obtained in (3) above; the resultant figure will be either surplus or
deficiency as regards unsecured creditors.
5. Add the amount of paid up share capital to the figure as obtained in
(4) above; the result will be either surplus or deficiency as regards
members or contributories.
6. Any likely expenditure on liquidation should be ignored. A note may
simply be given that deficiency or surplus as shown by the
Statement of affairs is subject to the cost of liquidation.
7. Any unrecorded asset or liability should be shown both in the
Statement of Affairs and the Deficiency or Surplus Account to make
double entry complete.
8. Personal guarantee given by any party including the guarantees
given by the directors for loans raised by the company should be
ignored while preparing the Statement of Affairs.
101
7.7.2 Lists to be Attached to the Statement of Affairs
Following lists are attached to the Statement of Affairs:
List A gives a complete list of assets not specifically pledged in favour of
secured creditors. Creditors having a floating charge on the assets are
considered as having assets not specifically pledged with them; so such
assets are included in this list.
List B gives the list of assets which are specifically pledged in favour of
fully secured and partly secured creditors.
List C gives the list of preferential creditors.
List D gives the list of debenture holders and other creditors having a
floating charge on the assets.
List E gives the names, addresses and occupations of unsecured

creditors and the amount due.
List F gives the names and number and value of shares held by various
preference shareholders.
List G gives the names and holdings of equity shareholders.
List H shows how Deficiency or Surplus in the Statement of Affairs has
been arrived at, i.e, it explains the reasons responsible for the surplus or
deficiency. According to the law, the period covered by Deficiency or
Surplus must commence on a date not less than 3 years before the
winding up order, or if the company has not been incorporated for the
whole of that period, the date of incorporation of the company, unless
the official Liquidator otherwise agrees.
7.8 DEFICIENCY OR SURPLUS ACCOUNT

The deficiency or surplus, as the case may be, stated in the statement of
affairs is to be proved separately by preparing another statement called
the Deficiency/Surplus Account. The items contributing to deficiency are
listed first, followed by items reducing deficiency. The difference
between the totals is the deficiency or surplus. This must tally with the
amount of deficiency/surplus stated in the Statement of Affairs.
The prescribed form of statement of affairs and deficiency/surplus
account can be understood with the following illustration.
Illustration 1
The following information is extracted from the books Unfortunate Ltd.
2018 on December 31, 2018, on which date the winding up order was
made:
102
Rs.
Unsecured creditors 4,56,000
Salaries due for 5 months 24,000
Bills payable 1,28,000
Bank overdraft 48,000
Weekly wages unpaid 7,000
Liabilities under workmen’s compensation Act 1,000
Income tax due 10,000
Debtors – good 4,50,000
Doubtful (estimated to produce Rs. 1,00,000) 2,00,000
Bad 1,28,000
Bills receivable (Good 15,000) 20,000
Stock (estimated to produce Rs. 7,00,000) 9,90,000
Cash in hand 14,000
Furniture and fixtures (estimated to produce
Rs.90,000) 1,00,000
Land (estimated to produce Rs.6,00,000) 4,32,000
Estimated liabilities for bills discounted 50,000
Secured creditors holding first mortgage on land 4,80,000
Partly secured creditors holding second mortgage
on land 2,40,000
6,000 9% mortgage debentures of Rs.100 each,
interest payable to September 30, and March 31,
paid to September 30, 2018 (interest not provided
for 3 months) 6,00,000
Share Capital: Rs.
24,000, 10% preference shares of Rs.10 each 2,40,000
60,000 equity shares of Rs.10 each 6,00,000
General Reserve Since December 31, 2014 1,10,000
In 2014, the company earned a profit of Rs.5,50,000 but thereafter it

suffered trading losses totaling Rs.7,00,000. The company also suffered
a speculation loss of Rs.60,000 during the year 2015. Excise authorities
imposed a penalty of Rs.4,00,000 in 2016 for evasion of tax which was
paid in 2017.
Prepare the Statement of Affairs and the Deficiency Account.
103
Solution:
Notes: Rs.
Unsecured creditors as per List E
Unsecured creditors 4,56,000
One month’s salaries (4 months’ salaries are preferential) 4,800
Bills payable 1,28,000
Bank overdraft 48,000
Amount not covered in respect of partly secured creditors 1,20,000

(Rs.2,40,000 – 1,20,000 value of security of second
mortgage on hand)
Liability on bills discounted 50,000
8,06,800
Preferential creditors as per List C
Salaries for 4 months 19,200
Weekly wages 7,000
Liabilities under Workmen Compensation Act 1,000
Income tax due 10,000
37,200
Unfortunate Ltd.
Statement of Affairs as on December 31, 2018
Assets Estimated
realizable
value Rs.
Assets not specifically pledged (as per List A)
Cash in hand 14,000
Bills receivable 15,000
104
Trade Debtors 5,50,000
Stock 7,00,000
Furniture and fixtures 90,000
Assets specifically pledged (as per List B)
Estimated Due to Deficiency Surplus Rs.

realizable secured ranking as
value Rs. creditors unsecured
Rs. Rs.
Land 6,00,000 7,20,000 1,20,000 -- Nil
Estimated total assets available for preferential creditors, 13,69,000

debenture holders secured by a floating charge and unsecured
creditors c/fd
Gross realizable value of assets specifically pledged 6,00,000
Other assets 13,69,000
19,69,000
Estimated total assets available for preferential

creditors, debenture-holders secured by a floating
13,69,000
charge and unsecured creditors b/fd
Gross Liabilities Rs.

liabilities
Rs. (to be deducted from surplus or added to deficiency

as the case may be)
6,00,000 Secured creditors (as per List B) to the extent which

claims are estimated to be covered by assets
Nil
specifically pledged
37,200 Preferential creditors (as per List C) 37,200
Estimated balance of assets available for 13,31,800

debenture-holders secured by floating charge and
unsecured creditors.
Debentures-holders secured by a floating charge
(as per List D) 6,00,000
105
Interest due for 3 months @ 9% 13,500
6,13,500 6,13,500
Estimated surplus as regards debenture-holders 7,18,300
8,06,800 Unsecured creditors (as per List E) 8,06,800
20,57,500 Estimated deficiency as regards creditors (being 88,500

difference between Gross assets and Gross
liabilities)
Issued and called up capital:
24,000, 10% preference shares of Rs.10 each, fully 2,40,000

paid (as per List F)
60,000 equity shares of Rs.10 each, fully paid (as 6,00,000

per List G)
Estimated deficiency as regards contributories
(as per List H) 9,28,500
Deficiency Account (List H)
A. Items controlling to deficiency: Rs.
1. Excess of capital and liabilities over assets on December Nil

31, 2014, as shown by the Balance Sheet
2. Net dividends and bonus declared during the period from Nil
January 1, 2015 to December 31, 2018
3. Net trading losses after charging depreciation, taxation, 7,13,500

interest on debentures etc. (loss after 2014
Rs.7,00,000+13,500 interest on debentures for 3 months)
4. Losses other than trading losses written off of for which

Provision has been made in the books during the same
period
Speculation loss Rs. 60,000
Penalty imposed by Excise authorities Rs.4,00,000 4,60,000
5. Estimated losses now written off or for which provision

has been made for the purpose of preparing the
statement.
Furniture and fixtures 10,000
106
Stock 2,90,000
Book debts 2,28,000
Bills receivable 5,000
Contingent liability for bills discounted 50,000 5,83,000
6. Other items contributing to deficiency Nil
Total (A) 17,56,500
B. Item reducing deficiency:
7. Excess of assets over capital and liabilities on December 1,10,000

31, 2014 as shown in the Balance Sheet (General
Reserve)
8. Net Trading Profit (after charging depreciation, taxation, 5,50,000

Interest on debentures, etc.)
9. Profits and income other than trading profits Nil
10. Other items reducing deficiency – profits expected on 1,68,000

realsiation of land
Total (B) 8,28,000
Deficiency as shown by Statement of Affairs (A)-(B) 9,28,500
LET US SUM UP
Liquidation or winding up is a legal term and refers to the procedure

through which the affairs of a company are wound up by law. A
company, being an artificial person, is created by law and effaced by
law. When the official liquidator has been appointed by the court, the
officers and directors of the company must submit within 21 days of the
court order (with in such extended time not exceeding 3 months) a
statement called ‘statement of affairs’. Statement of deficiency / surplus
explains as to how the surplus / deficiency has arisen.
CHECK YOUR PROGRESS

1. List H shows ___________
a) Deficiency b) Surplus
c) Secured creditors d) a and b
2. List C, gives the list of _________
a) Preferential creditors b) unsecured creditors
c) secured creditors d) none of the above
3. In case of liquidation, the first item in the order of payment to be
made by liquidator is _______
107
a) Preferential creditors b) Liquidation expenses
c) secured creditors d) none of the above
4. A contributory is a
a) creditor b) share holder
c) debenture holder d) Convertible debenture holder
5. The salary of a clerks for a period of 6 months before the relevant
date was in arrears. If the salary of each clerk is Rs.6000 p.m. the
amount to be included in preferential creditors will be __
a) Rs.96,000 b) Rs.14,400
c) Rs.80,000 d) Rs.72,000
6. A liquidator is entitled to 2% remuneration on assets realized, and
3% on amount distributed to unsecured creditors. The assets
realized Rs.1,00,000 including cast balance Rs.3000. Amount
available for distribution to unsecured creditors before liquidator
remuneration was Rs.46,350. The remuneration will be ____
a) Rs.3100 b) Rs.3140
c) Rs.3290 d) Rs.3330.50
GLOSSARY
Liquidation : A process by which dissolution of a

company is carried out.
List ‘B’ Contributories : A list of persons who were members of

the company during the 12 months
preceding the date of winding up.
Preferential Creditors : The creditors who are paid in priority to

all other unsecured creditors.
Statement of Affairs : A statement submitted by directors to

the liquidator containing details of the
assets and liabilities of the company to
be wound up.
Deficiency / surplus : An account prepared to prove the

account deficiency/surplus as mentioned in
statement of affairs.
SUGGESTED READINGS
108
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. #Liquidation of companies - An Introduction in Tamil | Format of
Liquidator's Final Statement of A/c - Bing video
2. MEANING OF LIQUIDATION ACCOUNTS IN TAMIL - Bing
video
3. How Does The Liquidation Process Work? - Bing video
1.d) 2.a) 3.b) 4.b) 5.c) 6.c)
109
UNIT 8
LIQUIDATOR’S FINAL STATEMENT OF
ACCOUNTS
STRUCTURE
Overview
Learning Objectives
8.1 Introduction
8.2 Liquidator’s final statement of account
8.3 Liquidator’s remuneration

8.4 Form of the liquidator’s final statement of accounts
8.5 Solved problems
Let us sum up
Check Your Progress
Glossary
Suggested Readings
OVERVIEW
When liquidation taken place, the job of realising various assets and
paying liabilities in a systematic way is performed by a person called
“Liquidator”. The appointment of liquidator depends upon the mode of
liquidation. When wound up by the tribunal, the tribunal shall appoint an
official liquidator from the panel maintained by the central government.
In case of voluntary winding up, the liquidator is appointed by a
resolution in general meeting of the company. The main job of the
liquidator is to collect the assets of the company and realize them and
distribute the money realized among right claimants.
LEARNING OBJECTIVES
• explain the duties of a liquidator.
• compute the liquidator’s remuneration.
• discuss the order of payment
• prepare the liquidator’s final statement of account.
110
8.1 INTRODUCTION
It is the liquidator’s job to realize the assets and settle the claim and
obligations of the company in the order mentioned already in this unit.
He maintains a cash book for recording receipts and payments, and he
submits an abstract of the Cash Book to the court in case of compulsory
winding up and to the company in case of voluntary winding up. The
liquidator prepares an account known as Liquidator’s Final Statement of
Accounts after the affairs of the company are fully wound up. This
account is prepared on the basis of the receipts and payments made by
him.
8.2 LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT
As we know, the main job of the liquidator is to collect the assets of the
company and realize them and distribute the money realized among
right claimants. For this purpose, he maintains a Cash Book for
recording the receipts and payments and is required to submit an
abstract of the Cash Book to the court in case of compulsory winding up
and to the company in case of voluntary winding up. The liquidator is
also required to prepare an account of winding up known as Liquidator’s
Final Statement of Account after the affairs of the company are fully
wound up. This account takes the form of Cash Account, and the
following receipts are shown on the debit side of this account:
1) Amount realized on sale of assets.
2) In case of assets specifically pledged in favour of creditors, only
the surplus from it, if any is entered as surplus from securities.
3) Amount received from delinquent directors and other officers of
the company.
4) In case of partly paid-up shares, the holders of equity shares
would be called upon to pay necessary amount not exceeding
the amount of uncalled capital if creditor’s claims/claims of
preference shareholders cannot be satisfied with the available
amount. In case the amount is still insufficient (after calling the
amount from the holders of partly paid equity shares) for paying
off the creditors, preference shareholders would be called upon
to pay necessary amount (not exceeding the uncalled amount on
such shares).
5) Contributions made by the contributories.
On the credit side of the account, he records the payments made in the
following order:
111
1) Payment of secured creditors and dues to workmen up to their
claim or up to the amount of securities held by secured creditors
as per Section 325. The balance of secured creditors left
unsatisfied (i.e., when the claims of the secured creditors are
more than the amount realized by sale of securities) will be
added to unsecured creditors.
2) Legal charges
3) Liquidator’s remuneration.
4) Liquidation expenses
5) Payment of creditors (e.g. debentures) having a floating charge
on the assets of the company. Interest on debentures should be
paid upto the date of actual payment to the debenture holders
and not only upto the date of liquidation provided the company is
solvent. But if the company is insolvent, interest is payable upto
the date of commencement of insolvency proceedings.
6) Workmen’s dues and claims of secured creditors as mentioned in
Section 326.
7) Payment of preferential creditors.
8) Payment of unsecured creditors. This may also include liability in
respect of dividend declared but not paid but the payment of
dividend due will be paid only after the amount due to outsiders
is paid.
9) Amount paid to preference shareholders. Arrears of dividends on
cumulative preference share should be paid upto the date of
winding up.
10) Amount paid to equity shareholders.
The various claims will be satisfied by the liquidator in the order

mentioned above. So, if the money available with the liquidator is
exhausted after paying, say, debenture holders partly or fully, payments
will not be possible to unsecured creditors, preference shareholders and
equity shareholders.
8.3 LIQUIDATOR’S REMUNERATION
The liquidator normally gets his remuneration in the form of commission

which is usually based on the value of assets realized and the payment
made to creditors. The percentage of commission may differ for the
assets realized and the payments made to creditors. While calculating
the liquidator’s remuneration the following points are to be borne in
mind:
• He gets the commission, at the agreed percentage on all assets

(not specifically pledged) realized by him. If the payment to the
112
secured creditors is made by him by way of selling the assets
specifically pledged, then he is entitled to the commission for the
proceeds so realized by him.
• Unless otherwise stated, he is not entitled for the commission on
cash and Bank balances.
• When the liquidator’s commission is based on the amount paid to
unsecured creditors, preferential creditors are also taken into
consideration because they are also unsecured creditors.
• If the amount available is sufficient to make the full payment of
unsecured creditors, the commission is calculated as follows:
Amount due to unsecured creditors ×% of commission
Liquidator’s remuneration = 100
If the amount available is not adequate to make the full payment

to the unsecured creditors, the commission is calculated as follows:
Amount avaiable to unsecured creditors ×% of commission
unsecured creditors
Liquidator’s remuneration = 100+% of commission
The same is explained with the help of the following example:

Creditors to be paid Rs. 3,00,000
Commission to be given on the amount paid to creditors 2%
Total amount available 1,02,000
The commission to be given will be Rs.2,000 i.e. 1,02,000 x 2/102 =
Rs.2,000
8.4 FORM OF THE LIQUIDATOR’S FINAL STATEMENT OF
ACCOUNTS’
Form No. 156

(See Rule 329)
Companies Act, 1956
Liquidator’s Statement of Account of the Winding up

(Members’/Creditors’ Voluntary Winding up)
(Pursuant to Section 497/509)
Statement showing how the winding up has been conducted and the
property of the company that has been disposed of from ….20
(commencement of winding up) to ….20 (close of winding up).
113
Estimated Value
Receipts Value realized Payments Rs. Rs.
Rs. Rs.
Assets: Legal charges:
Cash at Bank Liquidator’s remuneration
Cash at hand Where applicable -
Marketable securities % on Rs…. realised
Bills receivable % on Rs….. distributed
Trade debtors Total
Loan and advances
Stock in trade
Work in progress
Freehold property
Leasehold property
Plant and Machinery
Furniture, fixtures,
utensils, etc.
Patents, trade marks, Total costs and charges
etc.
Investments other than (i) Debentures holders:
marketable securities Payment of Rs….. per
Rs……. debentures
Surplus from Securities
Unpaid calls at (ii) Creditors:
commencement of …………*Preferential
winding up
…………*Unsecured:
Amounts receivable Dividend(s)…… p.in the
from calls on rupee on Rs. (The
contributories made in estimate of the amount
the winding up expected to rank for
dividend was Rs.)
Receipts per Trading (iii) Returns to
Account contributories:
….p. per rupee.+share….
….p. per rupee+share….
Other property, viz.,
…………………….
…………………....
Total
Less: Add: Balance
Payments to redeem
securities
Cost of execution
Payments per Trading
Account
*State the number; preferential creditors need not be separately shown if

all creditors have been paid in full.
+State nominal value and class of shares.
114
8.5 SOLVED PROBLEMS
Illustration 1
The following is the Balance Sheet of Bubble Ltd. as on 31st December
2002.
Balance Sheet of Bubble Ltd., as on December 31, 2002
Rs. Rs.
Share capital: Land & Building 25,000
8,000 preference shares of Other fixed assets 2,00,000
Rs.10 each 80,000 Stock 5,25,000
12,000 equity shares of Debtors 1,00,000
Rs.10 each 1,20,000 Profit & Loss A/c 58,000
Bank Loan 4,00,000
8% debentures 1,00,000
Interest outstanding on
Debentures 8,000
Creditors 2,00,000
9,08,000 9,08,000
The company went into liquidation on that date. Prepare the Liquidator’s
Statement of Account after taking into account the following:
1) Liquidation expenses and liquidator’s remuneration
amounted to Rs.3,000 and Rs.10,000 respectively.
2) Bank loan was secured by pledge of stock.
3) Debentures and interest thereon are secured by a floating
charge on all assets.
4) Fixed assets were realized at book values and current assets
at 80% of book values.
115
Solution
Bubble Ltd.
Liquidator’s Final Statement of Accounts
Receipts Rs. Payment Rs.
Assets realized: Liquidator’s remuneration 10,000
Land and Building 25,000 Liquidation expenses 3,000
Other fixed assets 2,00,000 Debentures having a
Debtors 80,000 Floating charge 1,00,000
Surplus from securities 20,000 Interest 8,000 1,08,000
Sundry Creditors 2,00,000
Preference shareholders
@Re. 0.50 per share on
8,000 shares 4,000
3,25,000 3,25,000
Illustration 2
A company went into liquidation on January 1, 2004. Its Balance Sheet
is as under:
Paid-up capital: Fixed assets:
1,000 6% preference shares Land and Building 2,00,000
of Rs.100 each 1,00,000 Plant and Machinery 2,20,000
2,000 equity shares of Rs.100 Current assets:
each, fully paid 2,00,000 Stock 1,00,000
3,000 equity shares of 100 Debtors 1,00,000
each, Rs.50 paid 1,50,000 Cash at Bank 30,000
Secured Loan: Miscellaneous expenditure:
6% debentures (floating Profit and Loss A/c 1,00,000
Charges on all assets) 1,00,000
Others:
(mortgage on land & building) 1,00,000
Current Liabilities:
Sundry creditors 90,000
Income tax 10,000
7,50,000 7,50,000
116
The preference dividends were in arrear for 3 years. The arrears are
payable on liquidation.
The assets were realized as follows: land and building Rs.2,40,000:
plant and machinery Rs.1,80,000 stock Rs.70,000: debtors Rs.60,000.
The expenses of liquidation amounted to Rs.8,000.
The liquidator is entitled to a commission at 2% on all assets realized
and 3% on amounts distributed to unsecured creditors.
All payments were made on June 30, 2003.
Prepare Liquidator’s Statement of Accounts.
Liquidator’s Statement of Accounts from January 1, 2004 to
June 30, 2004
Rs. Rs.
Assets realized: Liquidator’s remuneration:
Cash at Bank 30,000 2% on 5,50,000 realised 11,000
Sundry debtors 60,000 3% on Rs.1,00,000 distributed
Stock in trade 70,000 Among unsecured creditors 3,000
Plant and Machinery 1,80,000 Liquidation expenses 8,000
Surplus from securities 1,40,000 Debenture holders:
Principal 1,00,000
Interest upto June 30 3,000 1,03,000
Preferential creditors -
Income Tax 10,000
Unsecured creditors 90,000
Return to contributors:
Preference shareholders:
Capital 1,00,000
Arrears of dividends 18,000 1,18,000
Equity shareholders:
Rs.57.40 on 2,000 shares 1,14,800
Rs.7.40 on 3,000 shares 22,200
4,80,000 4,80,000
Working notes:
1. Debenture holders are entitled to interest up to the date of
payment since the company is solvent.
2. Preference dividend is payable only upto December 31, 2003.
3. Amount payable to equity shareholders:
Amount returnable on fully paid shares 57.40 (50+7.40)
117
Amount returnable on partly paid shares 7.40
Illustration 3.
Bekar Limited went into voluntary liquidation. The details regarding
liquidation are as follows:
Share capital:
1. 2,000 8% preference shares of Rs.100 each (fully paid –up)
2. Class A – 2,000 equity shares of Rs.100 each (Rs.75 paid –up).
3. Class B - 1,600 equity shares of Rs.100 each (Rs.60 paid-up)
4. Class C – 1,400 equity shares of Rs.100 each (Rs. 50 paid –up)
Assets including machinery realized Rs.4,20,000. Liquidation expenses
amount to Rs.15,000.
Bekar Limited has borrowed a loan of Rs.50,000 from Patel brothers

against the mortage of machinery (which realized Rs.80,500). In the
books of the company salaries of four clerks for four months at a rate of
Rs.200 per month and salaries of four peons for three months at a rate
of Rs. 150 per month, are outstanding. In addition to this, the company’s
books show the creditors worth Rs.88,200 and income tax deducted at
source by the company Rs.800. Prepare Liquidator’s statement of
Receipts and payments.
Solution
Liquidator’s statement of receipts and payments

Rs. Rs.
To Assets realized 4,20,000 By Payment of Secured
Creditors
Proceeds of call @ Rs. 1 (Loan of Patel Bros.) 50,000
per
Share on 1, 400 shares of (3)1,400 By Liquidation Expenses 15,000
class C (2)
By preferential creditors (1)5,800
By Unsecured creditors 88,200
By preference share holders 2,00,000
By Equity share holders:
Return of Rs.24 per share
On 2,000 class A shares (2)48,000
Return of Rs.9 per share on
1,600 class B shares (2)14,400
4,21,400 4,21,400
118
Working Notes:
(1)Calculation of Preferential Creditors Rs.
Income Tax Deducted at Source 800
Salary of 4 clerks@ Rs.200p.m. for 4 months 3,200
Salary of 4 peons @ Rs.150 p.m. for 3 months 1,800
5,800
(2) Calculation of Amount Returnable to Equity shareholders or

receivable from Equity shareholders.
Rs. Rs.
Assets realized 4,20,000
Less: Payments:
Secured Creditors 50,000
Liquidation Expenses 15,000
Preferential Creditors 5,800
Unsecured creditors 88,200 1,59,000
Balance available for shareholders 2,61,000
Less: Capital to be returned to preference 2,00,000

shareholders
Amount available for equity shareholders 61,000
Less: Equity share capital paid up:
Class A- 2,000 equity shares @ Rs. 75 = 1,50,000
Class B- 1,600 equity shares @ Rs.60 = 96,000
Class C – 1,400 equity shares @ Rs.50 = 70,000 3,16,000
Loss to be borne by equity shareholders 2,55,000
119
Total Loss Rs.2,55,000
Therefore, loss per equity share = = = Rs.51
Total No. of Equity Shares 5,000
Class A Class B Class C

Shares Rs. Shares Rs. Shares Rs.
Paid up amount per share 75 60 50
Less: Loss per share 51 51 51
Net amount receivable or

24 9 -1
returnable per share
LET US SUM UP
Liquidation is a legal procedure by which the corporate life of a company

is brought to an end. It is not necessary that only insolvent companies
should be liquidated. The job of realizing various assets and paying
liabilities is performed by a person called liquidator. The liquidator has to
follow the order of payment as per the Companies Act. The preferential
creditors as per Section 530 of the Companies Act are entitled to receive
the payment even before the unsecured creditors. The liquidator is
entitled to get a remuneration for the services rendered by him. He has
to prepare a Statement of Affairs to find out the amount of deficiency /
surplus and a deficiency / surplus account to know the reasons. In final
he has to prepare a liquidator’s final statement of account to show the
cash receipts from different sources and the payments made to different
parties.
CHECK YOUR PROGRESS
1. A creditor for Rs.10,000, holding a charge on the stock of the book

value Rs.12,000 (market value Rs.9,000) is _________
a) Fully secured creditor b) Partly secured creditor
c) Preferential creditor d) None of the above
2. Liquidator’s final statement of account is prepared ________
a) Only in case of member’s voluntary winding up
b) Only in case of compulsory winding up
c) In all modes of winding up
120
3. Debenture holders having a floating charge on assets have priority in
payment over ________
a) secured creditors
b) unsecured creditors
c) preferential creditors
4. In case a company being liquidated is solvent, the interest on
debenture is paid upto the date of __________
a) Commencement of winding up
b) Balance sheet preparation’s date
c) Payment of debentures
5. Amount due to the government for purchase of goods is an example
of
a) Preferential creditor b) Unsecured creditor
c) Secured creditor d) None of the above
GLOSSARY
Contributory : Every Person liable to contribute to the

assets of a company in the event of its
being wound up.
“A” list of : The present members of a company are

contribution included in ‘List A’.
Liquidator : Either appointed by court or by a resolution

in general meeting, to take control of all the
property of the company and its effects and
actionable claim and pay the right
claimants.
Liquidator’s : Liquidator normally gets the remuneration

Remuneration in the form of commission, based as a
percentage on the value of assets realized
and amount paid to unsecured creditors.
SUGGESTED READINGS
121
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Liquidators Final Statement of Accounts in Tamil | Calculation of
Liquidator's Remuneration in Tamil - YouTube
2. Liquidation Format|Calculation of Liquidator's Final Statement of
A/c in Tamil part -3 | liquidation - YouTube
3. Liquidator's Final Statement of Accounts Part - 4 || Liquidation
Format in Tamil || #liquidation - YouTube
4. Liquidator's Final Statement of Accounts || Part 5 in Tamil ||
Payment to Unsecured creditors - Bing video
1.b) 2.c) 3.b) 4.c) 5.b)
122
BLOCK 3
ACCOUNTS OF BANKING AND INSURANCE

COMPANIES
UNIT 9 : ACCOUNTS OF BANKING COMPANIES
UNIT 10 : ACCOUNTS OF LIFE INSURANCE COMPANIES
UNIT 11 : ACCOUNTS OF GENERAL INSURANCE

COMPANIES
123
UNIT 9
ACCOUNTS OF BANKING COMPANIES
STRUCTURE
Overview
Learning Objectives
9.1 Introduction
9.2 Important provisions
9.3 Specimen of Profit and Loss Account of Banking Company

9.4 Specimen of Balance Sheet of Banking Company
9.5 Accounting Treatment of some special items
9.5.1 Income Recognition
9.5.2 Bad debts and Provisions for Doubtful Debts
9.5.3 Provision for Taxation
9.5.4 Rebate on Bills Discounted
9.5.5 Interest on Doubtful Debts
9.5.6 Money at call and short notice
9.5.7 Acceptance, endorsement and other obligations

9.6 Management of Minimum Capital
9.7 Slip system of posting
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Today banks have become a part and parcel of our life. Banks cater to
the needs of agriculturists, industrialists, traders and to all the other
sectors of the society. A person who is doing the banking business is
called a Banker. Though some financial institutions like I.F.C., I.D.B.I.
are providing loans, they are not regarded as banks, as they do not
accept deposits from the public regularly. Unlike joint stock companies,
124
which obtains the required capital from the shareholders, banks obtain
the fund from public. Hence in the national interest, there is a need to
regulate the workings of banks by a separate Act.
LEARNING OBJECTIVES
• explain the important provisions relating to final accounts of
banking companies.
• describe the mode of disclosure of accounting policies
adopted by a banking company in the preparation of its
financial statements.
• explain the accounting treatment of certain specific
adjustments in the final accounts of banking companies.
• prepare final accounts of banking companies.
• explain the meaning of certain key terms.
9.1 INTRODUCTION
Banking business in India is largely governed by the Banking Regulation
Act, 1949. According to Section 5(b) of this Act, banking means “the
acceptance for the purpose of lending or investment of deposits of
money from the public repayable on demand, order or otherwise and
withdrawable by cheque, draft, order or otherwise”. “Thus, according to
this definition accepting of deposits from public for lending or investment
is the main function of a banking company. However, under Section 6 of
the Banking Regulation Act, a banking company can also carry some
other business such as, acting as agents for any government or local
authority or any other person, carrying on every kind of guarantee and
indemnity business, undertaking and executing of trust etc.
9.2 IMPORTANT PROVISIONS

The important provisions relating to final accounts of a banking company
are as follows:
1. Prescribed Form: The final accounts of a banking company

include the Profit & Loss Account and the Balance Sheet. It may
be noted that no Profit & Loss Appropriation Account is prepared
in case of a banking company. All appropriations are done in the
Profit & Loss Account itself. The Third Schedule to the Banking
Regulation Act, given the formats of the Profit & Loss Account and
the Balance Sheet. The formats have been revised w.e.f. 1st April
1991. In the other words the final accounts for the year ending 31st
March, 1992 and onwards are to be prepared in the new formats.
125
2. Accounting Year: On account of the amended provisions of the
Income Tax Act 1961 requiring every company to clsose its
accounts on 31st March each year, w.e.f. financial year ending 31st
March 1989, now a banking company also closes its accounts on
31st March each year.
3. Prohibition of Trading: A banking company can neither itself nor
on behalf of the others deal in buying or selling or bartering of
goods except in connection with the realization of security given to
or held by it (Section 8).
4. Non-banking Assets: A banking company may have to take
possession of a certain assets charged in its favour on account of
the failure of a debtor to repay the loan in time. Such an asset is
termed as a non-banking assert. It must be disposed off by the
banking company within 7 years of its acquisition (Section 9).
Income from or profit or loss on sale of such an asset has to be
shown separately in the profit and loss account of the banking
company.
5. Share capital: In order to ensure that no banking company
commences or carries on business with a weak and vulnerable
capital structure, section 11 lays down the following minimum
limits of paid-up capital and reserves to be complied with by a
banking company which wishes to commence or carry on business
in India.
6. Payment of Commission, Brokerage etc.: A banking company
cannot pay by way of commission, brokerage, discount or
remuneration in respect of shares issued by it an amount
exceeding in the aggregate 2.5 per cent of the paid-up value of the
said shares (Section 13).
7. Charge on Uncalled Capital: A banking company cannot create
any charge upon its Uncalled capital and any such charge shall be
void (Section 14).
8. Payment of Dividend: A banking company cannot pay dividend
on its shares until all its capitalized expenses (including
preliminary expenses, organization expenses, share selling
commission, brokerage, amount or losses incurred and any other
item of expenditure not represented by tangible assets) have been
completely written off.
9. Reserve Fund: Every banking company incorporated in India is
required to transfer at least 20 per cent of its profits of each year,
prior to the declaration of dividend, to the reserve fund. Such a
reserve is termed as “statutory reserve”. The Central Government
may on the recommendation of the Reserve Bank exempt a
126
banking company from this restriction if the aggregate amount of
reserves and share premium amount is not less than the paid up
capital of the banking company (Section 17).
10. Subsidiary Companies: In order to prevent the banking company
from carrying on trading activities indirectly by acquiring controlling
interest, it has been provided that a banking company can form a
subsidiary company only for one or more of the following purpose:
(i) The undertaking and executing of trust.
(ii) The undertaking of the administration of estates as
executor, trustee or otherwise.
(iii) The carrying on business of banking exclusively outside
India, with the prior permission of the Reserve Bank.
(iv) Such other purposes as are incidental to banking
business (Section 19)
11. Cash Reserve: According to Section 42 of the Reserve Bank of
India Act, every schedule bank has to maintain a sum equal to
atleast 3 percent of its time and demand liabilities as cash
reserves with the Reserve Bank of India. The Reserve Bank has
the power to increase the percentage upto 20 percent by a
notification in the official gazette. According to Section 18 of the
Banking Regulation Act, every non-scheduled bank is also
required to maintain in India by way of cash reserve with itself or in
any current account opened with the Reserve Bank of India or the
State Bank of India or partly in cash with itself and partly in such
account or accounts, a sum equivalent to atleast 3 percent of the
total of its time and demand liabilities in India.
12. Statutory Liquidity Ratio: Over and above the cash reserve, ever
banking company is required to maintain in India in cash, gold and
unencumbered securities, an amount which shall not be less than
25 percent of its time and demand liabilities in India. This is known
as” Statutory Liquidity Ratio”. The Reserve Bank has the power to
increase this ratio up to 40 Percent. It now stands at 33.75% w.e.f.
Sept. 17, 1994. The Reserve Bank has decided to gradually
reduce it to 25% over a three-year Period.
13. Loans and Advances: A banking company cannot grant any
loans or advances on the security of its own shares. Moreover, it
cannot enter into any commitment for granting any loan or
advance to or on behalf of the following persons:
(i) Any if its directors.
(ii) Any firm in which any of its director is interested as partner,
manager, employee of guarantor.
127
(iii) Any company (not being a subsidiary of a banking company
or a company registered under section 25 of the companies
Act, 1956 or government company) of which any of the
directors of the banking company is a director, manager
employee or guarantor or in which he holds substantial
interest.
(iv) Any individual in respect of whom any of its directors is a
partner or guarantor (section 20).
The above restrictions on grating of loans and advances were
introduced by and amendment in 1968 in the banking Regulation Act.
9.3 SPECIMEN OF PROFIT AND LOSS ACCOUNT
The profit & loss account of a banking company has to be prepared in

From B of schedule III, attached to the Banking Regulation Act.
Form ‘B’
Third schedule
FORM OF PROFIT AND LOSS ACCOUNT
Profit and loss account for the year ended 31st +March 20.
Schedule Year Ended (Rs)
I Income
Interest Earned 13 …...
Other Income 14 …...
Total ……
II Expenditure
Interest Expended 15 ……
Operation expenses 16 ……
Provisions and contingencies Total ……
…….
III Profit/Loss
Net Profit/ Loss) for the year …….
Total ……
IV Appropriations
Transfer to statutory Reserves …….
Transfer to other Reserves ……..
Transfer to Govt./proposed …….
Dividend
Balance carried over to Balance ……
sheet …….
Total
128
Schedules to be annexed with Profit and Loss Account
Schedule 13: Interest earned
Rs.
I. Interest/Discount on Advances/Bills ……..
II. Income on Investments …….
III. Interest on balances with RBI and other inter – ……..
bank funds
IV. Others …….
Total ………
Schedule 14: Other Income
Rs.
I. Commission, Exchange and Brokerage ……..
II. Profit on sale on investments …….
Less: Loss on sale of investments
III. Profit on revaluation of Investments …….
Less: Loss on Revaluation of Investments
IV. Profit on Sale of Land/ Building and other ……
assets
Less: Loss on sale of Land, Bldg other assets
V. Profit on exchange transaction ……
Less: Loss on exchange transaction
VI. Income earned by way of dividends etc. from ……..
subsidiaries/ companies and/ or joint ventures
abroad/ in India
IV. Misc. Income …….
Total ………
Note: Under items II to V loss figures may be shown in brackets
Schedule 15: Interest Expended

Rs.
I. Interest on Deposit ……..
II. Interest on RBI/Inter- Bank Borrowings …….
III. Others ……..
Total ………
Schedule 16: Operating Expenses
Rs.
I. Payment to and Provisions for Employees ……..
II. Rent, Taxes and Lighting …….
III. Printing and Stationary …….
IV. Advertisement and Publicity ……..
V. Depreciation on Bank’s Property ……..
VI. Director’s Fees, Allowances & Expenses ……
VII. Auditors’ Fees and Expenses ……..
(Including Branch Auditors)
VIII. Law charges ……..
IX. Postage, Telegrams, Telephone etc. ……..
129
X. Other expenditure ……
Total ………
Note:1 Corresponding figures for the immediately preceding financial

year should be shown in separate columns.
Note2: Provisions and Contingencies includes provisions made for bad
and doubtful debts, provision for taxation, Provisions for diminution in the
value of investments, transfers to contingencies and other similar items.
9.4 SPECIMEN OF BALANCE SHEET OF A BANKING COMPANY
The Balance sheet of a banking company has to be prepared in Form A
of schedule III, attached to the Banking Regulation Act.
The Third Schedule: Form “A”

Form of Balance Sheet
Balance Sheet as on 31st March…
Schedule Rs .
Capital & Liabilities …..
Capital 1 ….
Reserves and Surplus 2 …..
Deposits 3 …..
Borrowings 4 …..
Other Liabilities and Provisions 5 ……
Total: ……
Assets
Cash and Balance with RBI 6 ……
Balance with Banks and Money at Call &
7 ……
Short Notice
Investments 8 …….
Advances 9 ……
Fixed Assets 10 ……
Other Assets 11 ……
Total ……..
Contingent Liabilities
Bills for Collection 12 ……
The following schedules are required to be furnished with the Balance
Sheet.
Schedule 1. Capital
Rs.
I.For Nationalised Banks: ______
Capital (Fully owned by central government) ……….
II.For Banks Incorporated outside India:
i)Capital (the amount brought in by banks by way of start- …………
up capital as prescribed by RBI should be shown under this
130
head.
ii)Amount of Deposit kept with RBI under Section 11(2) of ………….
Banking Regulating Act, 1949.
Total ………….
iii)For Other Banks: ---------
Authorised Capital(…..share of Rs… each) …………
Issued capital (….. shares of Rs….each) …………
Subscribed Capital (…. shares of Rs…. each) ………..
Called up Capital (……shares of Rs….each) ……….
Less: Calls unpaid ………..
Add: Forfeited Shares …………

Schedule 2: Reserves and Surplus
Rs.
I. Statutory Reserves:
Opening Balance ……
Additional during the year ……
Deductions during the year …… ……
II. Capital Reserves:
Opening Balance ……
Auditions during the year ……
III. Shares premium:
Opening Balance …….
Additions during the year …….
Deductions during the year …….. ……..
IV. Revenue and other Reserves:
Opening balance ……
Additional during the year ……
V. Balance in Profit & Loss
……
Account:
VI. Total (I+II+III+IV+V) ……
Schedule 3: Deposits
Rs.
A.I. Demand Deposits:
(i) From Banks ………
(ii) From Others ……… ………..

II. Savings Bank Deposits
III. Term Deposits:
(i) From Banks ………
(ii) From Others …… ……..
Total (I, II&III)
B. (i)Deposits of Balances in India
(ii)Deposits of Branches Outside India ----------
Total ……….
131
Schedule 4: Borrowings
Rs.
I. Borrowings in India:
(i)Reserve Bank of India …….
(ii)Other Banks …….
(iii)Other Institutions and Agencies …….. ………
II. Borrowing Outside India ……..
Total (I and II) ……..
Secured Borrowing in I & II included …………
above
Schedules 5: Other Liabilities & Provisions
Rs.
I. Bills Payable ………
II. Inter- office Adjustment (net) ……….
III. Interest Accrued ……….
IV. Others (including Provisions) ………
Total …………
Schedule 6: Cash and Balances with RBI
Rs.
II. Cash in Hand (including foreign currency notes) ………
I. Balance with RBI in:
(i) Current Account ……….
(ii) Other Accounts ………
Total (I &II) …………
Schedule 7: Balance with Banks & Money at call and Short Notice
Rs.
I.In India
(i)Balance with Banks: …….
a) in Current Accounts …….
b) in Other Deposit Accounts …….. ………
ii) Money at Call & Short Notice ……..
a) With Banks ……..
b) With other Institutions …………
Total (I & II) ………
II. Outside India
i) In current accounts ……..
ii) In other Deposit Accounts …….
iii) Money at call and short notice …….
Total ……
Grand Total (I&II) ……
Schedule 8: Investments
Rs.
i. Investments in India in
(i) Govt. Securities …….
(ii) Other Approved Securities ……….
(iii) Shares ………
(iv) Debentures and Bonds ……..
(v) Subsidiaries and/or joint Ventures ……..
(vi) Others(to be specified) …………
Total ………
ii. Investments outside India in
132
i) Govt. Securities(incl. Local authorities) ……..
ii) Subsidiaries and/ or Joint Ventures …….
abroad
iii) Other investment (to be specified) …….
Total ……
Grand Total (I&II) ……
Schedule 9: Advances
Rs.
A. (i) Bills Discounted and purchased ……….
(i) Cash creditors, Overdraft and loans ………
payable on Demand
(ii) Term Loans ……..
1. Total ……..
B.(i) Secured by Tangible Assets …….
(ii). Covered BY bank/Govt.Guarantees ……..
(iii).Unsecured ……..
Total ……..
C.I.Advances in India:
(i) Priority Sectors ……..
(ii) Public Sector ………
(iii) Banks ………
(iv) Others ……..
Total ……..
II. Advances Outside India.
i) Due from Banks ……….
ii) Due from others:
(a) Bills purchased and discounted
……..
iii) (b) Syndicated Loans
……..
iv) (c) Others
……..
Total ……..
Grand Total (C.I. and C.II) ……
……
Schedule 10: Fixed Assets
Rs.
I. Premises :
At cost as on 31st March of the …….
preceding year
Additional during the year …….
Deductions during the year ……..
Depreciation to date ………. ……..
II. Other Fixed Assets (incl. Furniture
& Fixture)
At cost as on 31st March of the ……..
preceding year
Addition during the year ………
Deductions during the year ……….
Depreciation to date ………… ……..
…….
Total(I&II) ……
133
Schedule 11: Other Assets
Rs.
I. Inter –office Adjustments (net) ….….
II. Interest Accrued ……..
III. Tax paid in Advance/Tax Deducted at Sources ……….
IV. Stationery and Stamps ……...
V. Non-banking Assets acquired in satisfaction of …..….
claims
VI. Others* ……
Total ……….
*In case there is any unadjusted balance of loss (i.e. when the loss
exceeds the aggregate of capital, reserves and surplus). the same may
be shown under this item under appropriate footnote.
Schedule 12: Contingent liabilities
Rs.
I. Claims against the Bank not acknowledged as …….
debts
II. Liability for partly paid investments …….
III. Liability on account of outstanding forward …….
exchange contracts
IV. Guarantees given on behalf of constituents:
(i) In India ………..
(ii) Outside India ……..... …….
V. Acceptances, Endorsements and other Obligation …….
VI. Other items for which the bank is contingently …….
Liable
Total ……….
9.5 ACCOUNTING TREATMENT OF SOME SPECIAL ITEMS

Accounting treatment of some specific items in the Profit & Loss Account
and Balances sheet is being explained in the following pages.
9.5.1 Income Recognition
The banks have been recently advised by the Reserve Bank of India that
they should identify the non-performing assets and ensure that interest
on such nonperforming assets is not recognized as income and taken to
the profit and loss account w.e.f. financial year 1992-93.
The term non-performing assets means a credit facility in respect of

which the interest/instalment remains “past due” for a period of two
quarters i.e. six months. An amount under any of the credit facilities is to
be treated as “past due”, when it has remained outstanding for thirty
days beyond the due date. Moreover, if one of the accounts under the
134
new norms is an NPA, all the accounts of the borrowers (other than
loans with a liability of less than Rs.25,000) will be treated as NPAs.
9.5.2 Bad Debts and Provisions for Doubtful Debts
The business of a banking company depends on public confidence. In
order to ensure that this confidence is not impaired, the banks till
recently were given a special privilege permitting them not to show in
their published accounts bad debts and provisions for doubtful debts.
with effect from April 1, 1991 the amount of bad-debts and provision for
bad debts has to be charged under the heading “Provisions &
Contingencies” in the profit & Loss Account. In the Balance sheet, the
advances are shown after deducting both, bad debts and provision for
bad debts.
9.5.3. Provision for Taxation
Its treatment till recently was on the pattern of bad and doubtful. The
amount of Provisions for Taxation has to be charged to the Profit & Loss
Account under the heading “Provision & Contingencies”, in the Balance
sheet, it will be shown under the heading “Other Liabilities & Provisions”,
on the liabilities side.
9.5.4. Rebate on Bills Discounted
This refers to unexpired discount. A banking company charges discount
in advance for the full period of the bill of exchange or promissory note
discounted with it. However, it may be possible that the bills discounted
may mature after the close of the financial year. It will not be appropriate
to take to the credit of the profit and loss account that part of the
discount charged which relates to the next year. An accounting entry is,
therefore, passes for unearned discount in the following manner:
Discount A/C Dr.

To Rebate on Bills Discounted
(With the amount of unearned discount relation to the next period)
Rebate on bills discounted, if already appears in the trial balance is

taken to the balance sheet on the “liabilities side”. However, if
adjustment has to be done after preparation of the trial balance in
respect of rebate on bills discounted, the amount of such rebate (i.e, the
unearned discount) will be deducted from the total discount in the profit
and loss account and will also appear as a liability in the balance sheet.
135
Illustration 1:
The following is an extract from the Trial Balance of a Bank as at 31
March, 2019.
Rs. Rs.
Bills discounted 51,50,000
Rebate on bills discounted not yet due,

30,501
march31, 2019
Discount received 1,45,500
As analysis of the bills discounted as shown above shows the following:
Date of Bill Discounted@ %

Amount Rs. Term Months
2019 p.a.
January 13 7,50,000 4 12
February 17 6,00,000 3 10
March 6 4,00,000 4 11
March 16 2,00,000 2 10
Find out the amount of discount received to be credited to Profit and loss
account and pass appropriate Journal Entries for the same. How the
relevant items will appear in the bank’s Balance sheet?
Solution
Calculation of Unexpired discounts or rebate on Bills discounted
Date of
Maturity No.of. Proportionate
Amount Rate of Total
Date including days Discount for
discount Annual
of Bill three after Rs. days after 31st
% p.a. Discount
days of March31 March
grace
2019 2019 Rs. Rs.
Jan.13 May 16 46 7,50,000 12 90,000 11,342
(90,000x46/365)
Feb.17 May 20 50 6,00,000 10 60,000 8,219
(60,000x50/365)
March
July 9 100 4,00,000 11 44,000 12,055
6
136
(44,000x100/365)
March
May 19 49 2,00,000 10 20,000 2,685
16
(20,000x19/365)
34,301
So, unexpired discounts on 31st March 2019 is Rs.34,301.

Journal Entries
Rs. Rs
2019 March 31 Rebate on Bills Discounted Account Dr. 30,501
To Discount Account 30,501
(Being unexpired discount brought
forward from the previous year,
credited to Discount Account)
’’ 31 Discount Account Dr. 34,301

To Rebate on Bills Discounted
account 34,301
(Being provision for unexpired discount

required at the end of the year)
’’ 31 Discount Account Dr. 1,41,700

To Profit and Loss Account 1,41,700
(Being discount earned for the year
2018-2019 transferred)
9.5.5. Interest on Doubtful Debts

Interest earned by a banking company on doubtful debts can be treated
by transferring the interest earned to the credit of Interest Suspense
Account. Let as see the following example.
Illustration 2.
When closing the books of a bank on 31st March, 2011 You find in the
Loan Ledger an unsecured balance of Rs. 2,00,000 in the account of
merchant whose financial condition is reported to you as bad and
doubtful. Interest on the same account amounting to Rs. 20,000 (for
2010-11) remains to be recorded.
During the year 2011-12 the bank accepts 75 paise in a rupee on
account of the total payment of debt due from the merchant as on 31st
March, 2011.
Pass the necessary journal entries and prepare the necessary ledger
accounts in respect of the above transactions.
137
Solution:
Journal Entries
Date Particulars Dr. Amt Cr. Amt
Rs. Rs.
2011 March 31 Merchant’s A/c Dr. 20,000
To Interest Suspense A/c 20,000
(For interest due on doubtful debt of
Rs. 2,00,000 credited to Interest
Suspense account)
P&L Account Dr. 2,00,000

To Provision for Bad debts 2,00,000
(For creation of provision for bad
debts)
2012 March 31 Cash A/c Dr. 1,65,000

To Merchant’s A/c 1,65,000
(For dividend to 75 paise in a rupee
received from the merchant)
Interest Suspense A/c Dr. 5,000

Bad Debts A/c Dr. 50,000
To Merchant’s A/c 55,000
(Amount of interest not received
reversed and balance of the
account transferred to bad debts
accounts)
Interest Suspense A/c Dr. 15,000

To Profit & Loss A/c 15,000
(Amount of interest received
against interest suspense account
credited to the Profit and Loss
account)
Provision for Bad debts A/c Dr. 50,000

To Bad Debts A/c 50,000
(Bad debts written off against
provision)
138
Ledger Accounts
Merchants Account
Amount Amount
Date Particulars Date Particulars
Rs. Rs.
To Balance 2011 By Balance

2,00,000 2,20,000
1st Apr. b/d 31st Mar, c/d
2011 31st To Interest

20,000
Mar. Suspense A/c
2,20,000 2,20,000
Amount Amount
Rs. Rs.
To Balance 2012
2,20,000 By Cash 1,65,000
1st Apr. b/d 31st Mar,
By Interest
5,000
Suspense
By Bad Debts 50,000
2,20,000 2,20,000
Interest suspense account
Amount Amount
Rs. Rs.
2011 By Merchant’s
1st Apr. To Balance c/d 20,000 20,000
31st Mar, A/c
20,000 20,000
2012 To Merchant’s 2011 1 By Balance

5,000 20,000
31st Mar. A/c Apr. b/d
To P and L A/c 15,000
20,000 20,000
139
9.5.6 Money at call and short notice
These loans at call and at short notice, are given to bill brokers and
other bankers, when the bank have surplus money. The rate of interest
will depends on current money market condition. By giving share notice,
the money will be repaid by the borrower. It appears in balance sheet
under schedule :7.
9.5.7. Acceptance, endorsement and other obligations
This denotes bills which bank has accepted/endorsed on behalf of
customers. A customer may request his banker to act as a guarantor.
This is usually done in the case of foreign bills, Inland letters of credit,
foreign letter of credit, credit guarantees claims are some of the
accounts included under this heading. In case of non-payment, the
bankers liable to third parties. But can reclaim from its customers. This
item is shown as contingent liability in schedule 12.
9.6 MANAGEMENT OF MINIMUM CAPITAL

To ensure that no banking company commences or carries on business
with inadequate capital, section 11 of the Banking Regulation Act, 1949
prescribes the minimum limits of paid-up capital and reserves of the
banking company which are as follows:
(a) For banking companies incorporated outside India:
i) If it has a place of business in Mumbai or Kolkata Rs.20 lakhs
ii) if the places of business are elsewhere Rs.15 lakhs
The above sum must be kept deposited with the Reserve Bank of India
either in cash or in the encumbered securities.
In addition to the above sum, a further amount equal to 20% of the
annual profits in respect of business transacted through its branches in
India must be kept deposited with the Reserve Bank of India at the end
of each year.
(b) For banking companies incorporated in India.
(i) If the places of business are in
Rs.10 lakhs
more than one state and if any
place of business is in Mumbai
or Kolkata
(ii) If the places of business are in Rs.5 Lakh

more than one state and none
of the places of business is in
Mumbai or Kolkata
140
(iii) If the places of business are only Rs.1 lakh.
in one state and none of the
places of business is in Mumbai
or Kokata
For the principal place plus

Rs.10,000 for each additional
place of business in the same
district and Rs.25,000 for a place
of business outside the district
subject to a maximum of Rs.5
lakhs. But if the place of business
is only at one place, the maximum
amount required is Rs.50,000. For
a banking company which has
commenced business after 15th
September 1962, its paid-up
capital should be at least Rs.5
lakhs.
(iv) If the places of business are Rs.5 lakhs plus Rs.25000 to each
only in one state and if the place of business outside Mumbai
places of business are also in and Kolkata subject to a maximum
Mumbai or Kolkata. of Rs.10 lakhs.
A banking company commencing business after the coming into force of

the Banking Companies (Amendment) Act, 1962, shall have a paid-up
capital of not less than Rs.5 lakhs irrespective of the number of places of
its business.
Capital Adequacy Ratio

The limits as to share capital given above are inadequate because these
were fixed a long time back. To strengthen the capital base of the banks,
the Reserve Bank of India, on the recommendations of the Narasimham
committee introduced in April 1992 the risk weighted asset ratio system.
According to this system, paid up capital and reserves of a bank after
writing off bad debts should form an adequate percentage (8 to 10%) of
the assets of the bank, its investment, loans and advances. All these
items have been assigned weights according to the prescribed risks for
example, cash balances are not suspectable to any risks and are
assigned zero weight and loans and advances not guaranteed
141
susceptible to credit risks are assigned 100% weight. Ratio so computed
is known as capital adequacy ratio.
This ratio is used to protect depositors and promote the stability and
efficiency of financial systems around the world.
9.7 SLIP SYSTEM OF POSTING
In this system, posting is made from slips prepared inside the
organization itself or from slips filled in by its customers. So, entries are
not made in the books of original entry or subsidiary books, but posting
of entries is done from slips. In a banking company, the main slips are
pay-in-slips, withdrawal slips, and cheques and all these slips are filled
in by clients of the bank. These slips serve the basis of entry in the
ledgers and control accounts in the general ledger are prepared on the
basis of analysis of these slips.
Main reasons for the adoption of the slip system of positing by the
bank are the following:
(1) The bank must have customer’s account up-to-date for a
customer may present a cheque any time during hours meant for
the public. Slip system helps in keeping the accounts up- to date.
(2) The number of transactions in a bank is very large. The adoption
of slip system can suitably distribute the work of posting among
many persons.
(3) It ensures smooth flow of accounting work.
Main advantages of the slip system are:
1. Saving of time and labour. The bank saves a lot of time and
clerical labour as most of the slips are filled in by its customers.
2. No need of Subsidiary Book. Subsidiary books are avoided as
posting is done from slips.
3. Minimum delay. Entries can be recorded with minimum delay
as slips can easily pass from hand to hand among clerks
concerned.
4. Division of labour. The slip system enables the division of work
of posting among employees due to a large number of
transactions in a bank.
5. Smooth accounting. The writing of the daybook and posting of
the ledger can be done simultaneously without loss of time.
6. Reliable accounting system. Slip system provides a basis for
reliable accounting systems as most of the slips are prepared by
customers themselves. Moreover, each transaction is recorded
142
in different books which are maintained on self-balancing
system.
7. Perfect basis of auditing. Individual slips (known as vouchers)
are filled up by customers and becomes a proof for a transaction
to the satisfaction of the auditor.
8. Proper evidence. Slip duly filled by a customer provide
evidence of a transaction. When needed slips preserved by the
banks can be shown to the customers for their satisfaction.
Disadvantages of the slip system are:
1. Risk of loss or destruction of slips. Slips may be lost,
destroyed or misappropriated as these are loose.
2. Difficulty in verification. Books cannot be verified if subsidiary
books are not kept.
3. Inconvenience to customers. This system causes great
inconvenience to the illiterate and semi-literate customers as
these are to be filled in (especially the amount in words and
figures) with the help of other customers and arrogant bank
employees.
4. Risk of manipulation and misappropriation. Dishonest
employees can embezzle the money by destroying the loose
and large number of slips and manipulating the amounts.
5. Expensive system. Slip system becomes difficult due to large
number of daily transactions in a bank and becomes expensive
to keep a date-wise record of such slips
With the nationalisation of major commercial banks and changes
brought about in the economic and financial policies by the Government,
the environment in which the banks operate has undergone a sea
change. However, no effort was made to bring about a change in the
financial statements of banks to reflect the realities of the impact of the
environment.
Illustration 3
Prepare profit and loss accounts of Adarsh Bank Ltd. for the year
31.3.2018.
Amount for The Amount for the

Year ended year ended
Items Items
31.3.2018 Rs.(in 31.3.2018 Rs.
‘000) (in ‘000)
Interest/discount on Advertisement and

31,628 87
advances/bills publicity
143
Depreciation on
Income on investments 11,810 292
Bank’s property
Interest on balances Directors’ fees,

with reserve bank of 4,243 allowances and 7
India. expenses
Commission, exchange Auditor’s fees and

2,907 41
and brokerage expenses
Profit on sale of
114 Law charges 22
Investments
Postage, telegrams,
Interest on deposits 31,404 312
telephones, etc.
Interest on Reserve
Repairs and
Bank of India 3,362 91
Maintenance
borrowings
Payments to and
provisions for 9,717 Insurance 915
employees
Rent and taxes 955 Other expenditure 884
Balance of profit
Stationary 213 1,524
and loss account b/f
The following adjustments are to be made:
i) Make a provision for income-tax (including surcharge)

@51.75%
ii) Every year, the bank transfers 20% of profit to statutory
reserve and 5% of profit to revenue reserve.
iii) Dividend amounting to Rs.2,00,000 for the year ended 31st
March 2018 is proposed by the Board of directors.
Solution
Adarsh Bank Limited Profit & Loss Account
for the year ended 31st March
As on 31-3-98
Schedule
(Rs.In ‘000)
I. Income 47,681
Interest Earned 13 3,021
Other Income 14 50,702
II. Expenditure 34,766
Interest Expended 15 13,536
Operating Expenses 16
Provisions and Contingencies (Income 1,242
tax@51.75% and Rs.24,00,000 i.e. profit
144
before tax)
Total 49,544
III. Profit
Net Profit for the year 1,158
Profit brought forward 1,524
Total 2,682
IV. Appropriations
Transfer to Statutory reserve (20% of
232
Rs.11,58,000)
Transfer to Other Reserve (5% of
58
Rs.11,58,000)
Proposed Dividend 200
Balance carried over to Balance Sheet 2,192
2,682
Schedule 13- Internet Earned
As on 31-3-2018 (Rs.in
‘000)
1. Interest/Discount on Advances/Bills 31,628
2. Income on Investments 11,810
3. Interest on Balance with RBI 4,243
Total 47,681
Schedule 14- Other Income
(Rs.in ‘000)
I. Commission, exchange and brokerage 2,907
II. Profit on sale of investments 114
Total 3,021
Schedule 15- Interest Expended
(Rs.in ‘000)
I. Interest on deposits 31,404
II. Interest on RBI borrowings 3,362
Total 34,766
145
Schedule 16 - Operating Expenses
(Rs.in ‘000)
I. Payment to and provision for employees 9,717
II. Rent and taxes 955
III. Stationery 213
IV. Advertisement and publicity 87
V. Depreciation on Bank’s property 292
VI. Director’s fees, allowances and expenses 7
VII. Auditor’s fees and expenses 41
VIII. Law charges 22
IX. Postage, telegrams, telephones, etc. 312
X. Repairs and maintenance 91
XI. Insurance 915
XII. Other expenditure 884
13,536
Illustration 4. From the following information prepare a Balance Sheet

of International Bank Ltd. as on 31st March, 2016 giving the relevant
schedules.
Rs.in. Rs. in.

Debit Balances Credit Balances
Lakhs Lakhs.
Current Accounts 28.00 Share capital
19,80,000 shares of
Cash credits
812.10 Rs.10 each 198.00
Cash in Hand 160.15 Statutory Reserve 231,00
Net Profit before

Cash with RBI
37.88 appropriations 150.00
Cash with other Banks 155.87 Profit & Loss A/c 412.00
Money at call 210.12 Fixed Deposit A/cs 517.00
Gold 55.23 Saving Deposit A/c s 450.00
Govt. Securities 110.17 Current A/c 520.12
146
Premises 155.70 Bills payable 0.10
Borrowings from other

Furniture
70.12 Banks 110.00
Term Loans 792.88
2588.22 2588.22
Additional Information: Rs.
Bills for Collection 18,10,000
Acceptance and endorsements 14,12,000
Claims against the Bank not acknowledged

as debt 55,000
Depreciation charges- Premises 1,10,000
Furniture 78,000
50% of the Term Loans are secured by Government guarantees. 10% of

Cash credit is unsecured. Also calculate cash reserves required and
statutory liquid reserve required.
Note. Cash reserve required 3% of demand and time liabilities, liquid

reserves required 30% of demand and time liabilities.
Solution
International Bank Ltd.
Balance Sheet
as on 31st March, 2016
Schedule As on As on
No. 31.3.96 31.3.95
Capital and Liabilities
Share Capital 1 198.00
Reserve and Surplus 2 793.00
Deposits 3 1,487.12
Borrowings 4 110.00
Other Liabilities and Provision 5 0.10
Total 2,588.22
Assets
Cash and balance with RBI 6 204.76
Balance with Banks and Money 7 359.26
at Call and Short Notice
147
Investments 8 165.40
Advances 9 1,632.98
Fixed Assets 10 225.82
Other Assets 11 -
Total 2,588.22
Contingent Liabilities 14.67
Bills for Collection 18.10
Schedule 1 – Capital
(Rs.in ‘000)
Authorised Capital -
Issued, Subscribed and Paid up Capital
19,80,000 shares of Rs.10 each 198.00
Total 198.00
Schedule 2 – Reserves & Surplus
(Rs.in ‘000)
I. Stationery Reserve 231.00
Additions during the year 30.00 261.00
II. Balance in Profit & Loss A/c 532.00
(1)
Total 793.00
Schedule 3 – Deposits
(Rs.in ‘000)
I. Demand Deposits from others 520.12
II.Saving Bank Deposits 450.00
III.Fixed Deposits 517.00
Total 1,487.12
Schedule 4- Borrowings
(Rs.in ‘000)
Borrowings in India from other banks 110.00
Total 110.00
Schedule 5 – Other Liabilities & Provisions
(Rs.in ‘000)
Other liabilities and provisions 0.10
Total 0.10
148
Schedule 6 – Cash and Balance with RBI
(Rs.in ‘000)
I. Cash in hand 160.15
II. Balance with RBI(in current A/c) (2) 44.61
Total 204.76
Schedule 7- Balances with Banks & Money at call and short notice
(Rs.in ‘000)
In India.
(1) Balance with Banks
(i) in Current A/c (3) 149.14
(ii) Money at call and short notice 210.12
Total 359.26
Schedule 8 – Investments
(Rs.in ‘000)
Investments in India in
i) Govt. Securities 110.17
(ii) Others- Gold 55.23
Total 165.40
Schedule 9 – Advances
(Rs.in ‘000)
(A) (i) Cash credits, overdrafts 840.10
(ii)Term loans 792.88
1,632.98
(B) (i)Secured by tangible assets 1,152.53
(ii)Secured by bank/Govt. guarantees 396.44
( iii) Unsecured 84,01
Total 1,632.98
Schedule 10 – Fixed Assets
(Rs.in ‘000)
1.Premises
At cost on 31st March, 2016 156.80
Less: Depreciation to date 1.10
155.70
2.Other Fixed Assets
Furniture at cost on 31st March, 2016 70.90
Less: Depreciation to date 0.78
70.12
Total (1+2) 225.82
149
Schedule 11- Other Assets
Nil
Schedule 12- Contingent Liabilities
i. Claims against bank does not acknowledge as 0.55

debts
ii. Acceptances, endorsements 14.12
Calculation of Cash Reserves and Statutory Liquid 14.67
reserves
Total of demand and time liabilities
(Rs.517.00+Rs.450.00+Rs.520.12) 1,487.12
Cash reserve (3% of Rs.1,487.12) 44.61
Statutory liquid reserve 30.00
(30% of demand and time liabilities) 446.14
Working Notes:
(1) Balance in P/L A/c:
Net profit before appropriations 150.00
Add: Balance of Profit and Loss A/c 412.00 562.00
Less: Transfer to Statutory Reserve (20%of

30,00
Rs.150.00)
532.00
(2)Transfer from cash with other banks to

cash with RBI
Cash reserve required(3% on Rs.1487.12) 44.61
Cash with RBI 37.88
Transfer needed to maintain cash reserve 6.73
3)Liquid assets
Cash in hand 160.15
Cash with other banks 155.87
Money at call and short notice 210.12
150
Gold 55.23
Government securities 110.17
691.54
Excess liability [691.54-446.14 (i.e.30% of Rs.1,487.12)]=245.40 The

excess liability enables the transfer as per (2) above, after transfer, cash
with other banks = Rs.(in lakhs) (155.87-6.73)=Rs.(in lakhs) 149.14.
Illustration 5. From the following trial balance of Excellent Bank Ltd.,
prepare the B/S and P&L A/c marking all necessary provisions. You are
required to provide the following:
Rs.
1. Provision for taxation 10,00,000
2. Transfer to Dividend Equalisation fund 3,00,000
3. Provision for dividend@ 10%
Trial Balance as on 31-3-2016
(Rs. ‘000) (Rs. ‘000)
Compulsory deposit by income 3,120 Bills for collection 22,100

tax payers
Current Deposits 45,500 Liabilities for customers 11,168

acceptances
Saving Bank deposits 14,520 Investment in Govt. 45,200

Securities
Fixed and time deposits 37,180 Investment in shares 4,700
Sundry Creditors A/c 1,455 Interest accrued in 875

investments
Debts due to banks secured by 12,200 Loans 43,800

investments
Bills Receivable 22,100 Bills purchased and 33,100

discounted
Customers liability for 1,11,168 Furniture fixtures and 500

acceptances equipment
Rebate on bills discounted 15 Depreciation 500
Branch adjustment (Cr.) 4,555 Interest paid 1,200
Reserve Fund 10,000 Exchange and commission 100

paid
Dividend equalization fund 2,500 Salaries 2,400
151
Capital 2,00,000 shares of 10,000 Directors fees 100
Rs.100 each Rs.50 per share
paid up
Interest and discount received 5,800 Printing and stationery 400
Exchange and commission 1,700 Miscellaneous expenses 300

(Cr.)
General charges recovered 55 Land and Building 3,000
P&L A/c Balance as on 852 Money at call and short 1,500

1.4.2015 notice
Cash in hand 438 Property acquired in 50

satisfaction of claims
Cash with banks 6,869
Current accounts included Rs.88,00,000(debit balance) being overdraft.

One of the accounts Rs.95,000 including Rs.7,000 as interest for 2015-
16 is doubtful. During the year, property acquired in 2013 in satisfaction
of defaulted debt of Rs.25,000 was sold for Rs.18,000. The amount of
Rs.18,000 was credited to the account no further adjustments having
been made.
Excellent Bank Ltd.
Profit and Loss account
for the year ended 31st March, 2016
Rs. ‘000
Committed Year
Schedule
year ended
No.
ended 31- 31-3-15
3-16
I.Income
Interest Earned 13 5,800
Other Income 14 1,755
Total 7,555
II.Expenditure
Interest Expended 15 1,300
Operating Expenses 16 3,707
Provisions & Contingencies (1000+95) 1,095
Total 6,102
III.Profit/Loss
Net profit for the year(I)-(II)(i.e.7,555-6,102) 1,453
Profit brought forward 852
Total 2,305
152
Appropriations
Transfer to Statutory Reserve(20% of Rs. 1453) 291
Transfer to Dividend Equalisation Reserve 300
Proposed Dividend 10% of 1 crore 1000
Balance carried to B/S 714
2,305
Schedule 13- Interest Earned
Year ended 31-3-16
Interest/Discount on advances/bills 5,800
5,800
Schedule 14 – Other Income
(Rs. ‘000)
Commission, Exchange and Brokerage 1,700
Miscellaneous income
General charge recovered 55
1,755
Schedule 15- Interest Expended
(Rs. ‘000)
Interest on Deposits 1,200
Others: Exchange and Commission paid 100
Total 1,300
Schedule 16- Operating Expenses
(Rs. ‘000)
Payment to and provision for employees 2,400
Printing and Stationery 400
Depreciation on Bank’s Property 500
Directors fees, allowances and expenses 100
Other Expenditure
Loss on sale on non-banking assets 7
Miscellaneous expenditure 300
Total 3,707
Provisions and Contingencies
1. Provision for Income Tax 1,000
2. Provision for doubtful debts
On Account of advances 88
On Account of interest 7
( interest suspense)
Total 1,095
Balance sheet of Excellent Bank Ltd.

As on 31st March, 2016
Schedule as on as on
No. 31-3-16 31-3-15
Capital & Liabilities
Capital 1 10,000
Reserve & Surplus 2 13,805
Deposits 3 1,05,700
Borrowings 4 12,200
Other liabilities and Provisions 5 7,120
Total 1,48,825
153
Assets
Cash and bank balance with
RBI 6 438
Balance with Banks and money
at call and short notice 7 8,369
Investments 8 49,900
Advances 9 85,700
Fixed Assets 10 3,500
Other Assets 11 918
Total 1,48,825
Contingent Liabilities 12 1,168
Bills for collection 22,100
Working Notes:
Schedule 1 – Capital
as on 31-3-16
I. Capital (fully owned by central govt.) 10,000
Total 10,000
Schedule 2 – Reserves & Surplus

I. Statutory Reserve
(i) Opening Balance 10,000
(ii) Additions during the year 291
10,291
IV. Revenue and other reserves
(i) Dividend Equalisation reserve 2,500
Opening Balance 300
Additions during the year 2,800
V. Balance in P& L A/c 714
Total (I+IV+V) 13,805
Schedule 3- Deposits
I. Demand Deposits(45,200+8,800 overdrafts) 54,000
From Others
II. Savings Bank Accounts 14,520
III. Term Deposits
From others 37,180
Total 1,05,700
Schedule 4- Borrowings
I. Borrowings in India
Other banks
Secured against investments 12,200
Total 12,200
Schedule 5 –Other Liabilities & Provisions
I. Inter Office Adjustments (net) 4,555
II. Other liabilities including provisions
Interest Suspense A/c 7
Sundry Creditors 1455
Rebate on bills discounted 15
Other liabilities & Provisions 1,088
Total 7,120
154
Schedule 6- Cash and balance with RBI
I. Cash in hand
(including foreign currency notes) 438
Total 438
Schedule 7-Balances with Banks & Money At call and short Notice
In India
(i)Balance with Banks in
(a) Current Accounts 6,869
(ii)Money at call and short notice 1,500
Total 8,369
Investments in India
(i) Govt. Securities 45,200
(ii) Shares 4,700
Total 49,900
Schedule 9- Advances
A.(i) Bills purchased & discounted 33,100
(i)Cash credit overdraft & loan repayable on
demand
(43,800+ 8,800 over drafts including in current A/c 52,600
s)
Total 85,700
B.(i)Secured by tangible assets
(ii)Covered by Bank or Govt. Securities
(iii)Unsecured
Total 85,700
C.I. Advances in India
(i) Priority sectors
(ii) Public sector
(iii) Banks
(iv) Others
Total 85,700
II.Advances outside India.
(i) Due from banks
(ii) Due from others
a) Bills purchased and discounted
b) Syndicated loans
c) Others
Total
Schedule 10- Fixed Assets
I.Premises
(i) At cost on 31st March, 2016
(ii) Depreciation to date
3000
II.Other Fixed Assets
(including Furniture & Fixture) __
st
(i)at cost on 31 March, 2016
Depreciation to date 500
Total (1+2) 3,500
155
Schedule 11-Other Assets
Interest Accrued 875
Non Banking Assets 43
Total 918
Schedule 12 – Contingent Liabilities
Acceptances, Endorsements & Other Obligations 1,168
Total 1,168
LET US SUM UP
Banking companies are governed by Banking Regulation Act 1949.
Accepting deposits and lending loans are the two basic functions of a
banking companies. The business of a banking company depends on
public confidence. In order to ensure that this confidence is not impaired,
the banks are given special privilege permitting them not to show in their
accounts bad and provision for bad debts. While preparing the final
accounts of a bank, some items like rebate on bills discounted and
interest on doubtful debts need special care. All the items of incomes
and expenses are first to be entered in the appropriate schedule. Only
the total of these schedules will be entered in the profit and loss account.
The same procedure will be followed while preparing balance sheet.
CHECK YOUR PROGRESS
1. Prior to 1.4.1991 Provision for bad and doubtful debts in case of a
banking company was:
a) shown on the debit side of the profit and loss account.
b) shown as a deduction from the “interest and discount”
income on the credit side of the profit and loss account.
c) nowhere shown in the published accounts.
d) none.
2. Rebate on bills discounted for a banking company is:
a) an expense b) an income
c) a liability d) none
3. Appropriations out of profits in case of banking company are to be
made after 1.4.91 in
a) Profit and Loss Appropriation Account
b) Profit and Loss account
c) Balance Sheet.
d) none.
4. Paid up capital of a banking company must be one-half of:
a) Authorised capital
b) Subscribed capital
c) Called up capital.
d) None.
156
GLOSSARY
Statutory Reserve : A reserve created by a banking company
as per section 17 of the Banking
Regulation Act 1949.
This refers to discount received but not yet
Rebate on bills :
earned at the close of the financial year.
discounted
A credit facility in respect of which interest
Non-performing Asset :
or instalment has become overdue for
more than six months.
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. 2 Problems & Solutions in Profit & Loss a/c of Banking Company|
with Adjustments|Video-8|TamilBR - Bing video
2. T.Y.BCOM Final Accounts of Banking Companies/Solved
Example/Sem V/ Advanced Accounting/SPPU - YouTube
3. Banking Company Accounts|Part-1|Introduction|Format of Profit
& Loss Account|Dr.T.K.Avvai Kothai. - YouTube
1.b) 2. c) 3. b) 4. b)
157
UNIT 10
ACCOUNTS OF INSURANCE
COMPANIES – LIFE INSURANCE
COMPANIES
STRUCTURE
Overview
Learning Objectives
10.1 Introduction
10.2 Meaning of Insurance
10.3 Types of Insurance
10.4 Accounts of Life Insurance Business
10.4.1 Statutory Books
10.4.2 Subsidiary Books
10.4.3 Specimen of Life Insurance Revenue Account and
Balance Sheet
10.5 Determination of Profit
10.5.1 Valuation Balance Sheet
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Insurance is a co-operative device to spread the loss caused by a
particular risk over a number of persons who are exposed to it. Every
risk involves the loss of one or other kind. In fact, the loss is shared by
them by payment of premium which is calculated on the probability of
loss. There are three categories of insurance, viz., life, general and
social insurance. ‘Lloyd’s Association’ is one of the greatest and oldest
insurance institutions in the world. In India two corporation are
established under separate Acts, viz., Life Insurance Corp. Act 1956,
and General Insurance Corp. of India Act 1972. Privatization of
insurance brings more awareness towards insurance in India.
LEARNING OBJECTIVES
• define a contract of insurance.

• describe the meaning of different terms connected with
insurance business.
158
• compile the final accounts of life insurance companies.
• prepare valuation balance sheet.
10.1 INTRODUCTION
In India, the Insurance Act 1938 Controls the working and the activities
of companies carrying on insurance business. On 19 January 1956, Life
Insurance a business was nationalized by the government of India, and
the Life Insurance Act was passed. The General Insurance business
was also taken over by the Central Government with effect from 13th
May 1971.
10.2 MEANING OF INSURANCE
Insurance is a contract or agreement between two parties namely
insured and insurer. The insurer indemnifies the financial loss arises to
the insured due to destruction of property by Fire, Flood, Theft etc. or
loss due to the death of an individual. The insurer gets an amount, for
indemnifying loss, called ‘Premium’. The person whose risk is covered is
called ‘insured’ or ‘assured’. The company which indemnifies or cover
the risk is known as ‘insurer’ or insurance company’. The insurance
contract in written form is called policy.
10.3 TYPES OF INSURANCE
The term insurance is broadly classifieds into two; a) Life Insurance and
b) General Insurance. General Insurance may be further divided into
vehicle insurance, marine insurance, fire insurance, theft insurance, etc.
a) Life Insurance
In life insurance the insurer guarantees to pay a certain sum of money to

the assured after certain period or in the event of his death to his
nominee.
b) General insurance company

Any type of insurance other life insurance is called General insurance.
Marine, fire, burglary, theft, medical insurance etc., are few examples of
general insurance.
10.4 ACCOUNTS OF LIFE INSURANCE BUSINESS
The insurance act of 1938 laid provision as to the preparation of finial
accounts of insurance companies. Two types of books are maintained in
life insurance business 1) Statutory books and 2) Subsidiary book.
10.4.1 Statutory Books
The following statutory books are maintained.
159
a) Register of policies
It deals with particulars of policies such as name and address of the
assured, date on which the policy was effected etc.
b) Register of Claims
This contains the particulars of each claim such as the name and
address of the claimant, the date of claim, the date on which the claim
was settled or date and ground for rejection.
c) Register of licensed insurance agents
It includes particulars relation to agents, their names and addresses,
particular of business done and commission due to them.
10.4.2 Subsidiary books
Generally, the insurance company maintains the following subsidiary

books.
1. Proposal register
2. New premium cash register
3. Renewal premium cash register
4. Agency and Branch cash book.
5. Petty cash book
6. Claims cash book
7. General cash book
8. Commission register.
9. Lapsed and cancelled policies book.
10. Agency ledger
11. Policy loan register
12. Investment ledger
10.4.3 Specimen of life insurance Revenue Account and Balance
Sheet
Revenue account
No Particulars Schedule Current Previous
year year
‘000 ‘000
Premiums earned net 1
160
(a) premium
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from investments
(a) interest, dividends &
Rent-Gross
(b) profit on
sales/redemption of
investments.
(c) (Loss on sale/redemption
of investments)
(d) transfer/gain on
revaluation/change in fair
value
other income (to be
specified)
Total (A)
Commission
2
Operating expenses related
to insurance business 3
Provision for doubtful debts
Bad debts written off
Provision for tax
Provisions (other than
taxation)
(a) for diminution in the
value of investments
(net)
(b) others (to be specified)
Total (B)
Benefits paid (Net) 4
Interim bonuses paid
Change in valuation of
liability in respect of life
policies
(a) Gross
(b)Amount ceded in
Reinsurance
(c) Amount accepted in
reinsurance
Total (c)
Surplus (Deficit) (D) =(A) –
(B)-(C)
161
Appropriations
Transfer to Shareholders
account
Transfer to other reserves
(to be specified)
Balance being Funds for
Future Appropriations
Total(D)
Profit and Loss Account for the year ended 31st March, 20….
Share holders ‘ Account (Non –technical Account)
Current Previous
No. Particulars Schedule Year (Rs. Year (Rs.
‘000) ‘000)
Amount transferred from/ to the
Policy holders Account (Technical
Account)
Income from Investments
a)Interest, Dividends & Rent –
Gross
b)Profit on sale/redemption of
investments
c)(Loss on sale/redemption of
investment)
Other Income (To be specified)
Total (A)
Expense other than those directly
related to the insurance business
Bad debts written off
Provisions (other than taxation)
a)For diminution in the value of
investments (Net)
b)Provision for doubtful debts
c)Others (to be specified)
Total (B)
Profit (Loss) before tax
Provision for taxation
Profit/Loss after Tax
Appropriations
a) Balance at the beginning of
the year
b) Interim dividends paid
during the year
162
c) Proposed final dividend
d) Dividend distribution on tax
e) Transfer to reserves/other
accounts (to be specified)
Profit carried ……….. to the
Balance Sheet
Balance Sheet as at 31st March, 20……
Current Previous
Year Year
No. Particulars Schedule
(Rs. (Rs.
‘000) ‘000)
Sources of Funds
Shareholder’s funds:
Share capital 5
Reserve and Surplus 6
Credit/(Debit) Fair Value
change Account
Sub-Total
Borrowings
Policyholders ‘ Funds: 7
Credit/(Debit)Fair Value change
Account
Policy Liabilities
Insurance reserves
Provision for Linked Liabilities
Sub –Total
Funds for future appropriations
Total
Application of Funds
Investments
Shareholders 8
Policyholders 8A
Assets held to cover linked
8B
liabilities
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
163
Advances and other Assets 12
Sub-Total (A)
Current Liabilities 13
Provisions 14
Sub-Total (B)
Net Current Assets (C)=(A-B)
Miscellaneous Expenditure to
the extent not written off or
adjusted)
Debit Balance in Profit & Loss
Account
Shareholders Account
Total
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
Partly paid-up investments
Claims other than against policies, not

acknowledged as debts by the company
Underwriting commitments outstanding ( in

respect of shares and securities)
Guarantees given by or on behalf of the

Company
Statutory demand/liabilities in dispute, not

provided for
Reinsurance obligations to the extent not

provided for in accounts.
Others (the appetited)
Total
164
Schedule forming part of financial statements
Schedule 1 – Premium
Current Previous
No. Particulars Year (Rs. Year (Rs.
‘000) ‘000)
1. First year premiums
2. Renewal Premiums
3. Single Premiums
Total Premium
Schedule 2 –Commission Expenses
Current Previous
Particulars Year (Rs. Year (Rs.
‘000) ‘000)
Commission paid
Direct – First year premiums
- Renewal premium
- Single premiums
Add: Commission on Re- insurance Accepted
Less: Commission on Re-insurance Ceded
Net Commission
Note :The profit/commission, if any, are to be combined with the Re-

insurance accepted or Re –insurance cedes figures.
Schedule 3 – Operating expenses related to insurance business
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
Employees’ remuneration & welfare
1.
benefits
Travel, conveyance and vehicle running
2.
expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & stationery
7. Communication expenses
8. Legal & Professional charges
9. Medical fees
10. Auditors fees, expenses etc.
a)as auditor
165
b)as adviser or in any other capacity, in
respect of:
i) Taxation matters
ii) Insurance matters
iii) Management services; and
c)In any other capacity
11. Advertisement and publicity
12. Interest & Bank charges
13. Others (to be specified)
14. Depreciation
Total
Notes: Items of expenses and income in excess of one per cent of the
total premiums (less reinsurance) or Rs.5,00,000 whichever is higher,
shall be shown as a separate line item.
Schedule 4 – Benefits paid (net)

Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
1. Insurance Claims:
a) Claims by Death,
b) Claims by Maturity,
c)Annuities/Pension payment,
d)Other benefits, specify.
2. Amount ceded in reinsurance):
a) Claim by Death,
b) Claims by Maturity,
c)Annuities/Pension payment,
d)Other benefits, specify
3. Amount accepted in reinsurance
(a)Claims by death
(b) Claims by Maturity
(c) Annuities/Pension payment
(d) other benefits, specify
Total
Notes: (a) Claims include specific claims settlement costs wherever
applicable
: (b) Legal and other fees and expenses shall also form part of the
claims cost wherever applicable
166
SCHEDULE 5 – Share Capital
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
1. Authorised capital
Equity shares of ………. each
2. Issued capital
3. Subscribed capital
4. Called – up capital
Less: Calls unpaid
Add: Shares forfeited (Amount originally
paid up)
Less: Par value of equity shares bought
back
Less: Preliminary Expenses
Expenses including commission or
brokerage on underwriting or subscription
of shares
Total
Schedule 5 – Pattern of Shareholding
(As certified by the management)
Current year Previous year
Share
Number of % of Number of % of
capital
shares Holding shares Holding
Indian
Foreign
Schedule 6 – Reserves and surplus
Current Previous
‘000) ‘000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Share premium
4. Revaluation Reserve
5. General Reserve
Less: Debit balance in Profit and Loss
Account, if any
167
Less: Amount utilized for Buy-back
6. Catastrophe Reserve
7. Other Reserve (to be specified)
8. Balance of Profit in Profit and Loss Account
Total
Note: Additions to and deductions from the reserves shall be disclosed

under each of the specified heads.
Schedule 7 - Borrowings
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
1. Debentures/Bonds
2. Banks
3. Financial Institutions
Total
Note:
a) The extent to which the borrowings are secured shall be
separately disclosed stating the nature of the security under each
sub-head.
b) Amounts due within 12 months from the date of Balance Sheet
be shown separately.
Schedule -8 Investments – shareholders
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
Long –term Investments
Government securities and Government
1.
guaranteed bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
a) Shares
(aa) Equity
(bb) Preference
b) Mutual Funds
c)Derivative instruments
d)Debentures/Bonds
168
e) Other Securities (to be specified)
f) Subsidiaries
Investment Properties –Real Estate
Investment in Infrastructure and Social
4.
Sector
5. Other than Approved Investments
Short-term Investments
1.
(a)Shares
(aa) Equity
(bb) Preference
(b)Mutual Funds
(c)Derivative Instruments
(d)Debentures/Bonds
(e)Other Securities (to be specified)
(f)Subsidiaries
Investment Properties – Real Estate
Investments in Infrastructure and Social
4.
Sector
Total
Note : See Notes appended at the end of Schedule – 8B

Schedule 8A –Investments – Policyholders
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)

1.
3. a) Shares
(aa) Equity
(bb)Preference
b) Mutual Funds
c)Derivative Instrument
d)Debentures/Bonds
169
f) Subsidiaries
g) Investments Properties – Real Estate
Investments in Infrastructure and social
4.
sector
1.
guaranteed bonds including Treasury Bills.
3. (a) shares
(aa) Equity
(bb) Preference
(b)Mutual Funds
(d)Debentures/Bonds
(f)Subsidiaries
(g)Investment Properties-Real Estate
Investments in Infrastructure and Social
4.
Sector
Total
Note : See Notes appended at the end of Schedule -8B.

Schedule 8B – Assets held to cover linked liabilities
Current Previous
‘000) ‘000)

Government securities and
1. Government guaranteed bonds
including Treasury Bills
3. a) Shares
(aa) Equity
(bb)Preference
b) Mutual Funds
c)Derivative Instrument
d)Debentures/Bonds
170
f) Subsidiaries
g) Investments Properties – Real
Estate
Investments in Infrastructure and
4.
social sector
Government securities and
1. Government guaranteed bonds
including Treasury Bills.
3. (a) shares
(aa) Equity
(bb) Preference
(b)Mutual Funds
(d)Debentures/Bonds
(f)Subsidiaries
(g)Investment Properties-Real Estate
Investments in Infrastructure and
4.
Social Sector
Total
Schedule 9 – Loans
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
1. Security –wise Classification

Secured
(a)On mortgage of property
(aa) In India
(bb) Outside India.
b)On shares, Bonds, Govt. Securities, etc.
c)Loans against policies
d)Others (to be specified)
Unsecured
Total
2. Borrower –wise classification
171
a) Central and state Governments
b) Banks and financial Institutions
c)Subsidiaries
d)Companies
e) Loans against policies
f) Others (to be specified)
Total
3. Performance – wise Classification
a) Loans classified as standard
(aa) In India
(bb) Outside India.
b) Non-standard loans less provisions
(aa) In India.
(bb) Outside India.
Total
4. Maturity- wise Classification
(a)Short Term
b) Long Term
Total
Notes: Short term loans shall include those, which are repayable within
12 months from the date of balance sheet. Long term loans shall be the
loans other than short-term loans.
Schedule 10- Fixed assets
Particular Cost/Gross Block Depreciation Net Block
Opening AddiDeduc Closing Upto For On sales/ To As Previous

Last the Date at year
tionstions Adjustments
year year year
end
Goodwill
Intangibles
(specify)
Land –
freehold
Leasehold
Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office
Equipment
172
Others
(Specify
nature)
Total
Work in
Progress
Grand
Total
Previous
Year
Note : Assets included in land, property and building above exclude

Investment Properties as defined in now (e) to Schedule 8.
Schedule 11 – Cash and Bank Balances
Current Previous
‘000) ‘000)
Cash(including cheques, draft and
1.
stamps)
2. Bank Balances
a)Deposit Accounts
(aa) Short –term(due within 12
months of the date of Balance Sheet)
(bb)Others
b)Current Accounts
c)Others (to be specified)
3. Money at call and short Notice
a)With Banks
b)With other Institutions
Total
Balances with non-scheduled banks
in 2 and 3 above
Cash & Bank Balances
1. In India
2. Outside India
Total
Note : Bank balance may include remittances in transit. if so, the nature
and amount shall be separately stated.
Schedule 12- Advances and Other Assets
Current Previous
No. Particulars
Year Year
173
(Rs. (Rs.
‘000) ‘000)
Advances
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. Advances to Directors/officers
Advance tax paid and taxes deducted at
5.
source (Net of provision for taxation)
Total (A)
Others Assets
1. Income accrued on investments
2. Outstanding Premiums
3. Agents Balances
4. Foreign Agencies Balances
Due from other entities carrying on
5.
insurance business (including reinsures)
6. Due from subsidiaries / holding company.
Deposit with Reserve Bank of India
7. (Pursuant to section 7 of insurance Act,
1938).
Total (B)
Total (A +B)
Notes:
a) The items under the above heads shall not be shown net of
provisions for doubtful amounts. The amount of provision against
each head should be shown separately.
b) The term “officer” should conform to the definition of that term as
given under the Companies Act, 1956.
c) Sundry debtors will be shown under items 8 (Others).
Schedule -13 Current Liabilities
Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
1. Agents Balances
2. Balances due to other insurance
174
companies
3. Deposits held on re-insurance ceded
4. Premiums received in advance
5. Unallocated premium
6. Sundry creditors
7. Due to subsidiaries/holding company
8. Claims Outstanding
9. Annuities Due
10. Due to Officers/ Directors
11.
Others (to be specified)
Total
Schedule -14 Provisions

Current Previous
Year Year
No. Particulars
(Rs. (Rs.
‘000) ‘000)
For taxation (less payments and taxes
1.
deducted at source)
2. For proposed dividends
3. For divided distribution tax
Total
Schedule -15 Miscellaneous Expenditure
(To the extent not written off or adjusted)
Current Previous
‘000) ‘000)
Discount allowed in issue of
1.
shares/debentures
Total
Explanation of the Items in Revenue Account

1. Claims. Any amount payable by the insurance company is
called a claim. In life insurance business, claims may arise due to
two reasons i.e., by death or maturity. While calculating the figure
for claims, all claims intimated and accepted at the end of the
year, expenses relating to claims are to be added and out of the
total, claims outstanding at the beginning of the year and
175
reinsurances recoveries are to be deducted. The amount of
reinsurance recoveries is received under reinsurance contract
and it reduces the total claims to be paid by the business.
2. Annuity. It is an annual payment which a life insurance company
guarantees to pay for a lumpsum money received in the
beginning. It is an expense and shown under the head Benefits
Paid (Schedule 4).
3. Surrender Value. If an insured is unable to pay the further
premium, he can get his policy paid from the corporation. It is the
present cash value of the policy which a holder gets from the
corporation on surrendering all the rights of the policy. There is
no surrender value in case of general insurance policies. The
amount paid as surrenders appears as an expense in Schedule 4
under the heading “Other Benefits” in the Revenue Account.
4. Bonus in Cash. If the insurer has with profit policy, he will get
the bonus from the corporation. If the bonus is paid in cash, it is
shown on the debit side of the revenue account as an expense.
5. Bonus in Reduction of Premium. Instead of paying bonus in
cash, the insurer may deduct the bonus from the premiums due
from the insured. This is known as bonus in reduction of
premium. It is shown both as an expense and as an income by
adding to the premium in the Revenue Account. Bonus in
reduction of premium as an expense is shown as “Other Benefits
Paid” in Schedule-4.
6. Premium. The Premium received during the accounting period
plus outstanding at the end of the period, plus bonus in reduction
of premium minus outstanding premium at the beginning of the
period minus reinsurances premium is to be shown under the
heading “Premium Earned (Net)” (Schedule 1).
7. Consideration for Annuities Granted. Any lumpsum payment
received by the insurance company in lieu of granting annuity is
called as consideration for annuity granted and will be shown as
an income under the heading “Other Income”.
8. Interest, Dividend and Rent If the life insurance company has
received any interest, dividend and rent on its investment,
income tax thereon should not be deducted. Interest accrued and
outstanding is added to this item.
9. Commission on Reinsurance Accepted/Ceded The company
which passes some business to the other company get some
commission known as, commission on reinsurance ceded, and
deducted from commission paid.
176
The company which accepts such business is required to pay
commission on reinsurance accepted, and to be added with
“Commission paid” on direct business.
Illustration 1:
Following balance appeared in the books of the Happy Mutual Life
Assurance Society Ltd. as on 31st March, 2018:
Rs. in Lakhs Dr.

Claims less reassurances paid during the year:
By death 2,200
By maturity 1,500
Annuities 6
Furniture and office equipment at cost (including 250
Rs.40 lakh bought during the year)
Printing and stationary 77
Cash with bank in current account 1,350
Cash and stamps in hand 30
Surrenders less reassurances 40
Commission 250
Expenses of management 3,100
Sundry deposits with electricity companies, etc. 1
Advance payment of income-tax 50
Sundry debtors 50
Assets Balances 100
Income tax 450
Income tax on interest, dividends and rents 500
Loans and mortgages 150
Loans on policies 3,250
Investments (Rs. 250lakh deposited with the 52,000
Reserve Bank of India)
House property at cost (including Rs.85 lakh added 5,400
during the year)
70,754
Cr.
Life assurance fund at the beginning of the year 50,000
Premiums less reassurances 15,000
Claims less reassurances outstanding at the
beginning of the year:
177
By death 900
By maturity 600
Credit balances pending adjustment 60
Consideration for annuities granted 2
Interest, dividends and rents 1,800
Registration and other fees 2
Sundry deposits 100
Taxation provision 300
Premium deposits 1,150
Sundry creditors 350
Contingency reserve 150
Furniture and office equipment depreciation account 40
Building depreciation account 300
70,754
From the foregoing balances and the following information, prepare

Balance Sheet of the Happy Mutual life assurances society Ltd. as on
31st March 2018 and its Revenue Account for the year ended on that
date:
i) Claims less reassurance outstanding at the end of the year:
By death: Rs.600 lakh; By maturity: Rs.400 lakhs.
ii) Expenses outstanding Rs. 60lakh and prepaid Rs. 15lakh.
iii) Provide Rs.45lakh for depreciation on buildings; Rs.15 lakh
for depreciation on furniture and office equipment; and Rs.
110 lakhs for taxation.
iv) Premiums outstanding Rs. 2,028lakh; commission thereon
Rs. 65 lakhs.
v) Interests, dividends and rents outstanding (net) Rs. 30lakh
and rent accrued (net) Rs.350 lakh.
Solution
Happy Mutual Life Assurance Society Ltd.
Revenue Account
for the year ended 31-3-2018
Particulars Schedule Current Year Previous
Year.
Premiums Earned –Net 1 17,028
Income from Investments:
Interest, Dividends and 2,180
178
Rent – Gross
Other income:
Annuities Granted 2
Registration and other 2
fees
Total (A) 19,212
Commission 2 315
Operating Expenses 3 3,282
related to insurance
Business
Provision for Tax (I) 760
Total (B) 4,357
Benefits Paid (net) 4 3,246
Total (C) 3,246
Surplus(D)=(A)-(B)-(C) 11,609
(I)Figure of provision for taxation has been calculated as shown below:

Rs. in lakhs.
Income tax paid 450
Income tax on interest, dividend and rent 500
Provision for taxation to be made 110
1,060
Less: Existing taxation provision 300
760
Happy Mutual Life Assurance Society Ltd.

Balance Sheet
as on 31-3-2018
Particulars Schedule Current Previous
Year Year.
Sources of Funds
Share Capital 5 -
Reserves & Surplus 6 61,759
Borrowings 7 1,250
Total 63,009
Investments 8 56,805
Loans 9 3,400
Fixed Assets 10 195
Current Assets
179
Cash & Bank Balance 11 1,380
Advances and Other Assets 12 2,874
Sub-Total (A) 4,254
Current Liabilities 13 1,535
Provisions 14 110
Sub-Total (B) 1,645
Net Current Assets (C)=(A)-(B) 2,609
(Total of Schedules 8, 9, 10 and 63,009
Net Current Assets)
Schedule Forming Part of Financial Statements
Schedule 1 – Premiums
Particulars Current Year Previous year
Premiums 15,000
Add: outstanding 2,028
17,028
Schedule 2 – Commission
Commission Paid 250
Add: Commission on Reinsurance 65
Accepted
315
Schedule 3- Operating expenses related to insurance business.
Expenses of Management- Paid 3,100
Add: Outstanding 60
3,160
Less: Prepaid 15
3,145
Printing and Stationery 77
Depreciation:
Building 45
Machinery 15 60
3,282
Schedule 4 – Benefits Paid (Net)

Particulars Current Previous
Year year
Insurance Claims:
a) Claims by Death Paid 2,200
Add: Outstanding at the
end of the year 600
180
2,800
Less : outstanding at the 1,900
Beginning of the year 900
b) Claims by maturity paid 1,500
Add: outstanding at the
End of the year 400
1,900
Less: outstanding at the 1,300
Beginning of the year 600
c) Annuities 6
d) Other Benefits:
Surrenders 40
3,246
Schedule 6- Reserves & Surplus
Year year
Contingency Reserve 150
Other Reserves:
Life Assurance Fund:
At the beginning of the year 50,000
Add: Surplus as per revenue A/c 11,609 61,609
61,759
Schedule 7-Borrowings
Year year
Premium Deposits 1,150
Sundry Deposits 100
1,250
Schedule 8- Investments
Year year
Sundry Other Investments(52,000-250 deposited 51,750
with Reserve Bank of India)
Investment in House property at cost 5, 315
Add : Addition during the year 85
5,400
Less : Depreciation 345 5,055
56,805
181
Year year
Secured
On Mortgages 150
On Policies 3,250
3,400
Year year
Furniture & Office Equipment at Cost 210
Addition during the year 40
250
Less: Depreciation to date 55 195
195
Schedule 11- Cash and Bank Balances
Year year
Cash and stamps in hand 30
Cash with Banks in Current Account 1,350
1,380
Schedule 12 – Advances and Other Assets
Year year
Prepaid Expenses 15
Advances Payment of Income Tax 50
Interest Dividend and Rent Outstanding 30
Interest Dividend and Rent Accrued 350
Outstanding Premiums 2,028
Agent’s Balance 100
Deposit with Reserve Bank of India 250
Deposit with Electricity Companies 1
Sundry Debtors 50
2,874
Schedule 13- Current Liabilities
Year year
Sundry Creditors 350
Claims Outstanding 1,000
Expenses Outstanding 60
Credit Balance pending Adjustment 60
182
Commission due but not yet paid 65
1,535
Schedule 14 – Provisions

Year year
Provision for Tax 110
110
10.5 DETERMINATION OF PROFIT IN LIFE INSURANCE BUSINESS

A life generally taken for a number of years. The premium received for
such long-terms contracts cannot be treated as income for ascertaining
the profit for that year. For example, under a contract of annuity only one
premium as initial payment is received whereas the annuitant is required
to be paid annuity till, he dies. In case of life insurance, the claim must
arise either on death or expiry of the period of the policy, whichever is
earlier. That the future premium may or may not be received depends on
the existence of the insured. Thus, on a particular date a liability of the
corporation is to be calculated as the premiums to be received in future
will generally be less than the amount payable as claims. There is a gap
between claims which are expected to arise and premiums which are
expected to be received. This gap is known as net liability. Thus, it
becomes desirable to create a reserve equal to its net liability in order to
ascertain the profit made by the corporation. The Life Insurance
Corporation of India makes the valuation of its net liability every year in
order to ascertain its profit. This is done by a person known as actually
i.e. mathematician well versed in the intricacies of life insurance. the
process by which net liability is ascertained by an actuary, is known as
actuarial valuation. This is necessary to determine the profit in case of
life insurance business.
10.5.1 Valuation Balance Sheet
The Life Insurance Corporation of India will have to ascertain its net
liability on the various life insurance policies and annuity contracts. The
net liability is ascertained by actuaries once in 2 years in case of LIC of
India. This is called Valuation. The process of valuation involves the
following 3 steps:
Rs.
Find out : Present value of insured amounts of current
XXXX
policies , which will have to be paid in future
Deduct: Present value of premium in respect of current XXX
183
policies, which will be received in future
Net Liability XXX
Form –I
Valuation Balance Sheet

As at ………..
Rs. Rs.
To Net liability as per XXXX By Life Insurance fund XXXX
actuary’s valuation as Per B/S
To Surplus XXX By Deficit XXX
Total XXX Total XXX
The excess of life Insurance Fund over net liability is surplus.

Bonus Payable on Policy holders in respect of with-profit policies:
Rs. Rs.
Surplus as per valuation Balance sheet XXXX
Less: Actuarial expenses (outstanding) XXX
Dividends payable to share holders XXX XXX
Add : Interim bonus paid XXX
XXX
Net Surplus XXX
95% of net surplus is payable as bonus to policyholders in respect of

with profit policies. while paying the above bonus, interim bonus paid
already has to be deducted. The balance 5% may be utilized for such
purposes as determined by the government.
Illustration 2
A life insurance company gets its valuation made once in every two
years. Its life assurance fund on March 31 , 2003 amounted to 40,00,000
before providing Rs.40000 for the shareholder’s dividend for the year
2002-2003. its actuarial valuation due on March 31, 2003 disclosed net
liability of Rs.38,00,000 under assurance annuity contracts.
184
An interim bonus of Rs,50000 was paid to the policy holders during the 2
years ending March31, 2003. Prepare a statement showing the amount
now available as bonus to policy holders.
Solution
Valuation Balance sheet: As on 31.03.2003.
To net liability as per 3800000 By Life insurance 4000000

actuary’s valuation fund s per Balance
sheet
To Surplus 200000
4000000 4000000
Particulars Rs.
Surplus as per Valuation B/s 200000
Add : Interim bonus paid to Policy holders 50000
250000
Less: Dividend for 2002-2003 due to share
holders 40000
Profit 210000
Policy holder in get 95% of 210000 199500
Less: Amount of interim bonus paid 50000
Amount now due to the policy holders 149500
Illustration 3
After the valuation on March 31, 2018 in the books of Life Assurance
Company Ltd, the actuary’s certificate disclosed the net liability on
policies and annuities at Rs. 50,40,000.
From the following information prepare the revenue account and

ascertain profit and loss made by the company. It was further decided by
the directors to transfer a sum of Rs.1,00,000 to the Investment
fluctuation fund which stood at Rs.2,00,000 on that date to write down
investments from Rs.49,00,000 to 46,00,000 if the valuation revealed a
surplus:
185
Bonus in cash 1,00,000 Expenses of 2,50,000

Management
Bonus in reduction 10,000 Commission 1,00,000

of premiums
Surrenders 2,00,000 Annuities 8,00,000
Premiums 35,00,000 Consideration for 12,00,000

Annuities granted
Interests, Dividends 12,00,000 Life assurance fund on 40,00,000

and Rents (net) 1-4-2017
Claims 22,00,000 Interim Bonus paid for the 1,50,000

valuation period
As a result of valuation, it was decided that a reversionary bonus of

Rs.150 per Rs.10,000 be granted and the company gave the
policyholders the option to get bonus in cash @ Rs.60 per Rs.10,000.
The total business in force was Rs.9 crores. One third of the policy
holders in value decided to get the bonus in cash. Draft the journal
entries for the above decisions giving effect to utilization of the surplus:
show how much the policyholders can get by way of share in profit
(ignore taxation).
Solution
Life Assurance Company Ltd.
Revenue Account
for the year ending 31st March, 2018.
Premium Earned (Net) 35,00,000
Income from Investments:
Interest, Dividends and Rent 12,00,000
Less: Loss on Revaluation 1,00,000 11,00,000
Other income: Consideration for Annuities
Granted 12,00,000
Total (A) 58,00,000
Commission 1,00,000
Operating Expenses related to Insurance
Business – Expenses of Management 2,50,000
Total (B) 3,50,000
Benefits Paid (Net) : Claims 22,00,000
186
Annuities 8,00,000
Surrenders 2,00,000 32,00,000
Bonus in Cash 1,00,000
Bonus in Reduction of Premiums 10,000 1,10,000
Total (C) 33,10,000
Surplus (D) =(A) –(B) –(C) 21,40,000
Rs.
Balance in Life Assurance at the beginning of the year 40,00,000
Add : Surplus as per Revenue A/c this year 21,40,000
Total Life Assurance Fund 61,40,000

Rs. Rs.
To Net Liability as per 50,40,000 By Life Assurance 61,40,000
Actuarial Valuation Fund
To surplus 11,00,000 1,00,000
61,40,000 61,40,000
Rs.
Surplus as revealed by Valuation Balance Sheet 11,00,000
Add : Interim Bonus Paid 1,50,000
True Surplus subject to Taxation 12,50,000
Policyholders will get 95% 11,87,500
Less: Interim bonus paid to policyholders 1,50,000
Amount due to policy holders 10,37,500
Journal
Date Particulars Rs. Rs.
2018 Mar, Life Assurance fund A/c Dr. 11,00,000

31
To Profit & Loss A/c 11,00,000
(Being profit revealed by valuation

balance sheet transferred to P/L
187
A/c)
“ Profit & Loss A/c Dr. 1,80,000
To Bonus in Cash 1,80,000
(Being the immediate bonus

payable @ Rs.60 per Rs.10,000
on Rs.3 crores)
“ Profit & Loss A/c 3,60,000

Dr.
To Life Assurance fund A/c 3,60,000
(Being the transfer of the sum life

assurance fund of net liability at
present value in respect of
reversionary bonus @ Rs.60 per
Rs.10,000 on Rs.6 crores)
As a result of the above-mentioned entries the life assurance fund would

stand at Rs.54,00,000(i.e., 61,40,000 + 3,60,000 – 11,00,000) and Profit
& Loss A/c would show a balance of Rs. 5,60,000 (i.e., Rs.11,00,000 –
Rs.1,80,000 - Rs. 3,60,000)
LET US SUM UP
Insurance is a contract or agreement between two parties under, which
one party undertakes, in consideration of a certain periodical fixed
amount called Premium' to indemnify the other against certain amount of
loss arising from the destruction of property by fire etc. or loss due to
death. The contract is called a policy when it is in the written form. The
person whose risk is covered is called insured, and who covers the risk
is called insurer. Insurance is divided into two, Life insurance and
General Insurance. General insurance is divided further into fire
insurance, marine insurance, theft insurance, etc. The two types of
books maintained by the insurance companies are statutory book and
subsidiary book. The annual accounts are completed by preparing a
Revenue account and Balance sheet.
CHECK YOUR PROGRESS

1. Policy maturing only on the death of the insured is termed as
a) Endowment Policy b)Whole Life Policy
c)With Profit Policy d) none of the above
2. Bonus payable only on the maturity of the policy is termed as:
a) Cash Bonus, b)Reversionary Bonus,
188
c)Interim Bonus. d)none of the above
3. Bonus is reduction of premium appears in the revenue account
a) as an expense, b)as an income,
c) as foot note d)none of the above
4. Expenses of Management not applicable to any particular business
are shown in :
a) Revenue A/c
b) Profit and Loss A/c
c) Profit and Loss Appropriation A/c.
d)none of the above
5. Legal fees in respect of claims are shown in
a) Revenue Account
b) Profit and Loss Account
c)Profit and Loss Appropriation account.
d)none of the above
GLOSSARY
Insurance policy : A formal written document containing the

terms of contract of insurance.
Life Assurance Fund : A fund representing the excess of revenue

income over revenue expenditure relating to
life insurance business.
Reserve for : A reserve created by a general insurance

Unexpired Risk company in respect of insurance risk which
may mature next year.
Revenue Account : An account showing a profit, or a loss made

by an insurance business, during a particular
period. A separate revenue account for each
type of insurance business is prepared.
Reversionary Bonus : Bonus declared after every two years but

payable only on the maturity of policy
together with the policy amount.
Valuation Balance- : A statement prepared in case of a life

Sheet insurance business for determining the profit
made during the period covered. It is usually
prepared after every two –year period.
189
SUGGESTED READINGS

New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Accounts of Insurance Company - YouTube
2. Insurance Company Accounts | Part-1| Important items in
Revenue Account | -Dr.T.K.Avvai Kothai. - YouTube
3. Insurance Company Accounts |Part-3|Life insurance Revenue
Account |Problem-1|Dr.T.K.Avvai Kothai - YouTube
4. Insurance Accounts | Part-2|Life Insurance Revenue Account
Format& Preparation|Dr.T.K.Avvai Kothai - YouTube

1.b) 2.b) 3.a) 4.b) 5.a)
190
UNIT 11
ACCOUNTS OF INSURANCE
COMPANIES – GENERAL INSURANCE
COMPANIES
STRUCTURE
Overview
Learning Objectives
11.1 Introduction
11.2 Types of General Insurance Policies
11.3 Accounts of General Insurance Companies

11.3.1 Reinsurance
11.3.2 Bonus in reduction of premium
11.3.3 Reserve for unexpired risk
11.4 Specimen off General Insurance Revenue Account and
Balance Sheet
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
General Insurance Companies are insurance companies transacting all

types of insurance business other than life insurance business. Since
human life cannot be valued exactly, a person can take any number of
policies for any amount depending upon his capacity to pay the
premium. In the event of policy maturing, the insurance company must
pay the policy amount as actual loss cannot be determined. But general
insurance policies are contract of indemnity. Therefore, the company
would pay only the actual loss suffered, notwithstanding the amount for
which the policy is taken.
191
LEARNING OBJECTIVES
• explain the purpose of taking general insurance policies.
• prepare revenue account as per legal requirements.
• prepare balance sheets in a specified format.
11.1 INTRODUCTION
In General Insurance is a business of all types of insurance other than
life insurance business. Unlike life insurance policies, these policies are
taken for a short period of one year although the policy can be renewed
year after year. General insurance can be taken by the insured at any
time during the year. Premiums on such policies are always paid in
advance. Risks of fire are covered by fire policies. Goods and vessels
exposed to marine risks are covered by marine insurance policies. There
are miscellaneous policies to insure accidents, theft, loss of profits and
death to employees at work spots. There are several principles
governing insurance business. They are principle of indemnity, insurable
interest, and principles of uberrimaefidei.
11.2 TYPES OF GENERAL INSURANCE POLICIES
Any insurance business other than Life Insurance business is called as
General Insurance. It consists of:
1. Fire Insurance
2. Marine Insurance
3. Loss of Profits Insurance
4. Burglary Insurance
5. Workmen Compensation
6. Third Party Insurance etc.
A General Insurance Company has to prepare Revenue A/c separately

for each branch of business namely for Fire Insurance, for Marine
Insurance etc.
11.3 ACCOUNTS OF GENERAL INSURANCE COMPANIES

General Insurance Companies may be doing more than one business –
fire, marine, accident consequential loss etc.
11.3.1 Re Insurance
An Insurer may share the risk covered by him, by transferring a part of
the risk to another insurer. It is called as re insurance. The transferor is
called as first insurer and the transferee is called as reinsurer. The first
insurer gives a proportionate share of premium to reinsure. In turn if any
192
claim is made, the first insurer collects the proportionate amount from
the re insurer. Insurance transferred to the re insurer is known as
Reinsurance ceded for the first insurer and Re-insurance accepted for
the second insurer.
The proportionate premium given to re insurer is deducted from his
premium a/c. The re insurer or Second insurer added it in his premium
account.
11.3.2 Bonus in Reduction of Premium
In general, the general insurance company allows a rebate on the
premium payable for the renewal policy of the same assets in the
subsequent year. It is known as ‘Bonus in reduction of Premium’ or ‘No
Claim Bonus’. However, this rebate is given to the policy holder who
have not made claim on that asset in the previous years. The rebate is
treated as expenses and debited to revenue account.
11.3.3 Reserve for Unexpired risk

In general insurance, the coverage is for a period of 12 months from the
date of insurance. Sometime the coverage period may fall on the next
accounting year. But the entire premium for the year is received in
advance, at the time of taking policy. Hence at the end of accounting
year there will be number policies which validity expires in the next
accounting year. The insurance company creates a reserve for the
unexpired portion of the risk in the policies. The reserve is shown on the
debit of revenue account by name ‘Provision for unexpired risk’ at the
end of the current year. It is also shown on the liability side of the
Balance sheet.
The percentage of reserve varies according to the types of insurance. In
case of marine insurance 100% of the net premium and in other cases
50% of the net premium is created.
11.4 SPECIMEN OF GENERAL INSURANCE REVENUE ACCOUNT
AND BALANCE SHEET
Revenue Account for the year Ended 31st March, 20….
Policy holders’ Account (Technical Account)
No. Particulars Schedule Current Previous

Year Year
(Rs.’000) (Rs.’000)
1. Premiums Earned (Net) 1
2. Profit/Loss on sale/redemption of
investments
193
4. Interest, Dividend & Rent – Gross
Total (A)
1. Claims incurred (Net) 2
2. Commission 3
3. Operating Expenses related to 4
Insurance Business
Total (B)
Operating Profit/(Loss) from
Fire/Marine / Miscellaneous
Business C = (A-B)
APPROPRIATIONS
Transfer to Shareholder’s Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be
specified)
Total (C)
Profit and Loss Account for the year ended 31st March, 20….
Share holder’s Account (Non-technical Account)
Current Previous
No. Particulars Schedule Year Year
(Rs.’000) (Rs.’000)
1. Operating Profit / (Loss)
a) Fire Insurance
b) Marine Insurance
c) Miscellaneous Insurance
2. Income from Investments
a) Interest, Dividend & Rent – Gross
b) Profit on sale of investments
Less: Loss on sale of investments
3. Other Income (To be specified)
TOTAL (A)
4. Provisions (Other than taxation)
a) For diminution in the value of
investments
b) For doubtful debts
194
c) Others (to be specified)
5. Other Expenses
a) Expenses other than those
related to insurance Business
b) Bad debts written off
c) Others (to be specified)
TOTAL (B)
Profit before Tax
Provision for Taxation
Profit after Tax
Appropriations
a) Interim dividends paid during the
year
b) Proposed final dividend
c) Dividend distribution tax
d) Transfer to reserves or other
account (to be specified)
Balance of profit/loss brought
forward from last year
Balance carried forward to Balance
Sheet
Balance Sheet as At 31st March, 20…..

Current Previous
No. Particulars Schedule Year Year
(Rs.’000) (Rs.’000)
Sources of Funds
Share Capital 5
Reserves and Surplus 6
Fair Value Change Account
Borrowings 7
Total
Application of Funds 8
Investments
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and Other Assets 12
195
Sub-total (A)
Current Liabilities 13
Provisions 14
Sub-Total (B)
Net Current Assets (C)=(A-B)
Miscellaneous Expenditure (to the 15
extent not written off or adjusted)
Debit Balance in Profit & Loss
Account
Total
Current Previous
No. Particulars Year Year
(Rs.’000) (Rs.’000)
1. Party paid-up investments
2. Claims, other than against policies, not
acknowledged as debts by the company
3. Underwriting commitments outstanding (in
respect of shares and securities)
4. Guarantees given by or on behalf of the company
5. Statutory demands/liabilities in dispute, not
provide for
6. Reinsurance obligations to the extent not
provided for in accounts
7. Other (to be specified)
Schedules Forming Part Of Financial Statements

Schedule 1 – Premiums Earned (NET)
Current Previous
(Rs.’000) (Rs.’000)
Premium from direct business written
Add: Premium on reinsurance accepted
Less: Premium on reinsurance ceded
Net Premium
Adjustment for change in reserve for unexpired
risks
Total Premium Earned (Net)
Note: Reinsurance premiums whether on business ceded or accepted

are to be brought into account, before deducting commission under the
head of reinsurance premiums.
196
Schedule 2 – Claims Incurred (NET)
Current Previous
(Rs.’000) (Rs.’000)
Claims paid
Direct
Add: Re-insurance accepted
Less: Re-insurance ceded
Net Claims paid
Add: Claims outstanding at the end of the year
Less: Claims outstanding at the beginning
Total Claims Incurred
Notes:
a) Incurred But Not Reported (IBNR). Incurred but not enough
reported (IBNER) claims should be included in the amount for
outstanding claims.
b) Claim include specific claims settlement cost but not expenses of
management.
c) The surveyor fees, legal and other expenses shall also form part
of claims cost.
d) Claims cost should be adjusted for estimated salvage value if
there is a sufficient certainty of its realization.
Current Previous
(Rs.’000) (Rs.’000)
Commission paid
Direct
Add: Re-insurance accepted
Less: Commission on Re-insurance Ceded
Net Commission
Note: The profit / commission, if any, are to be combined with the Re-
insurance accepted or Re-insurance ceded figures.
197
Schedule 4 – Operating Expenses related to Insurance Business
Current Previous
(Rs.’000) (Rs.’000)
1. Employees’ remuneration & welfare benefits
2. Travel, conveyance and vehicle running
expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & Stationery
7. Communication
8. Legal & professional changes
9. Auditors’ fees, expenses etc.
(a) as auditor
(b) as adviser or in any other capacity, in respect
of:
i) Taxation matters
ii) Insurance matters
iii) Management services; and
(c) in any other capacity
10. Advertisement and publicity
11. Interest & bank charges
13. Depreciation
Total
Note: Items of expenses and income in excess of one per cent of the
total premiums (less reinsurance or Rs.5,00,000 whichever is higher,
shall be shown as a separate line item.
Schedule 5 – Share Capital
Current Previous
(Rs.’000) (Rs.’000)
1. Authorised Capital
Equity Shares of Rs……….. each
2. Issued Capital
3. Subscribed Capital
4. Called-up Capital
Equity Shares of Rs. ……… each
198
Less: Calls unpaid
Add: Equity Share forfeited (Amount originally
paid up)
Less: Par Value of Equity Shares bought back
Less: Preliminary Expenses
Expenses including commission or brokerage
on underwriting or subscription of shares
Total
Notes:
a) Particulars of the different classes of capital should be separately
stated.
b) The amount capitalized on account of issue of bonus shares
should be disclosed.
c) In case any part of the capital is held by a holding company, the
same should be separately disclosed.
Schedule 5a – Share Capital pattern of Shareholding
(As certified by the Management)
Current Year Previous Year
Number Number % of
Shareholder % of
of of Holding
Holding
Shares Shares
Promoters
• Indian
• Foreign
Others
Total
Schedule 6 – Reserves and Surplus
Current Previous
(Rs.’000) (Rs.’000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Securities Premium Account
4. General Reserves
Less: Debit balance in Profit and Loss Account
Less: Amount utilized for Buy-back
5. Catastrophe Reserve
6. Other Reserve (to be specified)
7. Balance of Profit and Loss Account
199
Note: Additions to and deductions from the reserves should be
disclosed under each of the specified heads.
Schedule 7 – Borrowings
Current Previous
(Rs.’000) (Rs.’000)
1. Debentures / Bonds
2. Banks
3. Financial Institutions
Total
Note:
a) The extent to which the borrowings are secured shall be
separately disclosed stating the nature of the security under each
sub-head.
b) Amounts due within 12 months from the date of Balance Sheet
be shown separately.
Current Previous
(Rs.’000) (Rs.’000)
LONG TERM INVESTMENTS
1. Government securities and Government
a) Shares
i) Equity
ii) Preference
b) Mutual Funds
c) Derivative Instruments
d) Debentures / Bonds
f) Subsidiaries
g) Investment Properties – Real Estate
4. Investments in Infrastructure and Social Sector
200
SHORT TERM INVESTMENTS
1. Government securities and Government
a) Shares
i) Equity
ii) Preference
b) Mutual Funds
c) Derivative Instruments
d) Debentures / Bonds
f) Subsidiaries
g) Investment Properties – Real Estate
4. Investments in Infrastructure and Social Sector
5 Other than Approved Investments
Current Previous
(Rs.’000) (Rs.’000)
Security – wise Classification
1. a) On mortgage of property
i) In India
ii) Outside India
b) On Share, Bonds, Govt. Securities etc.
Others (to be specified)
Unsecured
Total
2. Borrower-wise Classification
a) Central and State Governments
b) Banks and Financial Institutions
c) Subsidiaries
d) Industrial Undertakings
e) Others (to be specified)
3. Performance – wise Classification
a) Loans classified as standard
i) In India
ii) Outside India
b) Non-performing loans less provisions
i) In India
ii) Outside India
201
4. Security-wise Classification
a) Short Term
b) Long Term
Total
Cost/Gross Block Depreciation Net Block
Particulars Upto For As

On Sales/ To Previous
Opening Additions Deductions Closing Last the at
Adjustments Date Year
Year Year year
Goodwill
Intangible
(specify)
Land free
hold
Lease hold
property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office
Equipment
Others
(Specify
nature)
Total
Work in
progress
Grand Total
Previous
Year
Note : Assets included in land, building and property above exclude

investment Properties as defined in note (e) to Schedule 8.
Schedule 11 – Cash and Bank Balances

Current Previous
(Rs.’000) (Rs.’000)
1 Cash (including cheques, drafts and stamps)
202
2. Bank Balances
(a) Deposit Accounts
i) Short-term (due within 12 months)
ii) Others
(b) Current Accounts
(c) Others (to be specified)
3. Money at Call and Short Notice
a) With Banks
b) With Other Institutions
Total
Balance with non-scheduled banks in 2 and 3
above
Note : Bank balance may include remittances in transit. If so, the nature
and amount shall be separately stated.
Schedule 12 – Advances and Other Assets
Current Previous
(Rs.’000) (Rs.’000)
Advances
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. Advances to Directors / Officers
Advance tax paid and taxes deducted at source
5.
(Net of provision for taxation)
Total (A)
Others Assets
1. Income accrued on Investments
2. Outstanding Premiums
3. Agents’ Balances
4. Foreign Agencies Balances
Due from other entities carrying on insurance
5.
business (including reinsurers)
6. Due from subsidiaries / holding
Deposit with Reserve Bank of India (Pursuant to
7.
section 7 of Insurance Act, 1938)
Total (A + B)
203
Schedule 13 – Current Liabilities
Current Previous
(Rs.’000) (Rs.’000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded
4. Premium received in advance
5. Unallocated premium
6. Sundry creditors
7. Due to subsidiaries / holding company
8. Claims outstanding
9. Due to officers /directors
Total
Schedule 14 – Provisions
Current Previous
(Rs.’000) (Rs.’000)
1. Reserve for Unexpired Risk
For taxation (less advance tax paid and taxes
2.
deducted at source)
3. For proposed dividends
4. For dividend distribution tax
Total
Schedule 15 – Miscellaneous Expenditure
(To the extent not written off or adjusted)
Current Previous
(Rs.’000) (Rs.’000)
1. Discount Allowed on issue of shares/debentures
Total
Illustration 1
On 31st March, 2018 the books of Zee Insurance Company Limited,
contained the following particulars in respect of fire insurance:
204
Amount Amount
(Rs.) (Rs.)
Reserve for Unexpired Expenses of Management
Risks on March 31, 2017 5,00,000 (including Rs.30,000 legal
Additional Reserve for Expenses paid in connection
Unexpired Risk on March with the claims) 2,80,000
31, 2017 1,00,000 Interest and Dividend 64,250
Premiums 11,20,000 Income Tax on the above 6,520
Claims paid 6,40,000 Profit on Sale of Investment 11,000
Estimated Liability in Commission paid 1,52,000
Respect of Outstanding
Claims
On March 31, 2017 65,000
On March 31, 2008 90,000
On 31st March, 2018 provide Rs.5,60,000 as unexpired risk reserve and

Rs.75,000 as additional reserve.
You are required to prepare the Fire Insurance Revenue account as per
the regulations of IRDA, for the year ended 31st March 2018.
FORM B – RA
Name of the Insurer : Zee Insurance Company Limited
Registration No. and Date of Registration with IRDA : …………
Revenue Account
for the year ended 31st March, 2018
Particulars Schedule Amount

(Rs.)
Premiums Earned (Net) 1 10,85,000
Profit and Loss on sale/ Redemption of Investment 11,000
Others: --
Interest Dividend & Rent (Gross) 64,250
Total (A) 11,60,250

Claims incurred (Net) 2 6,95,000
Commission 3 1,52,000
205
Operating Expenses related to Insurance Business 4 2,50,000
Total (B) 10,97,000
Operating Profit from Insurance Business (C)=(A)-(B) 63,250

Particulars Amount
(Rs.)
Premiums 11,20,000
Less: Adjustment for Change in Reserve for Unexpired Risk (1) 35,000
Total Premium earned 10,85,000
Schedule 2 – Claims Incurred (NET)
Particulars Amount
(Rs.)
Claims paid 6,40,000
Add: Legal Expenses regarding Claims 30,000
6,70,000
Add: Claims Outstanding as on 31st March, 2018 90,000
7,60,000
Less: Claims Outstanding as on 31st March, 2017 65,000
6,95,000
Particulars Amount
(Rs.)
Commission paid 1,52,000
1,52,000
Schedule 4 – Operating Expenses Related to Insurance Business
Particulars Amount
(Rs.)
Expenses of Management (Rs.2,80,000 – Rs.30,000) 2,50,000
2,50,000
206
Working note
(1) Calculation for Change in Reserve for Unexpired Risk
Rs. Rs.
Reserve for Unexpired Risk as on 31st March, 2018 5,60,000
Additional Reserve as on 31st March, 2019 75,000 6,35,000
Less: Reserve for Unexpired Risk as on 31st March 2017 5,00,000
Additional Reserve as on 31st March, 2017 1,00,000 6,00,000
35,000
Note: Interest and dividends are shown at gross value in Revenue

Account. Income tax on it will not be included in the Revenue Account as
it is the part of Profit and Loss Account of an Insurance Company.
Illustration 2
From the following information as on 31st March 2018, prepare Revenue
Account of Sagar Bhima Co.Ltd. engaged in Marine Insurance Business:
Particulars Direct Re-
Business insurance
(Rs.) (Rs.)
I. Premium:
Received 24,00,000 3,60,000
Receivable – 1st April, 2017 1,20,000 21,000
- 31st March, 2018 1,80,000 28,000
Premium paid -- 2,40,000
Payable – 1st April, 2017 -- 20,000
- 31st March, 2018 -- 42,000
II. Claims:
Paid 16,50,000 1,25,000
Payable – 1st April, 2017 95,000 13,000
- 31st March, 2018 1,75,000 22,000
Received -- 1,00,000
Receivable – 1st April, 2017 -- 9,000
- 31st March, 2018 -- 12,000
III. Commission:
On Insurance Accepted 1,50,000 11,000
On Insurance Ceded -- 14,000
Other expenses and Income:
207
Salaries – Rs.2,60,000; Rent, Rates and Taxes – Rs.18,000; Printing
and Stationery – Rs.23,000; Indian Income Tax paid – Rs.2,40,000;
Interest; Dividend and Rent received (net) – Rs.1,15,500; Income Tax
deducted at source – Rs.24,500; Legal Expenses (Inclusive Rs.20,000
in connection with the settlement of claims) – Rs.60,000; Bade Debts –
Rs.5,000; Double Income Tax Refund – Rs.12,000; Profit on Sale of
Motor Car Rs.5,000.
Balance of Fund on 1st April 2017 was Rs.26,50,000 including Additional
Reserve of Rs.3,25,000. Additional Reserve has to be maintained at 5%
of the net premium of the year.
Solution
Sagar Bhima Co.Ltd.

Revenue Account in Respect of Marine Business
for the year ending 31st March 2018 (Form B – RA Prescribed by IRDA)
Particulars Schedule Current Previous
Year year (Rs.)
(Rs.)
1. Premium Earned (Net) 1 25,21,750
2. Profit on Sale / Redemption of Investments --
3. Other Incomes:
Double Income Tax Refund 12,000
Profit on Sale of Motor Car 5,000
4. Interest, Dividends and Rent (Gross)
(Rs.1,15,500 + Rs.24,500) 1,40,000
Total (A) 26,78,750
1. Claims Incurred (Net) 2 17,81,000
2. Commission 3 1,47,000
3. Operating Expenses related to Insurance 4
Business 3,46,000
Total (B) 22,74,000
Operating Profit form Marine
Business (C) = (A) – (B) 4,04,750
Note: Income tax paid and tax deducted at source will have to be shown
as advances under the head “Advances and Other Assets (Schedule 12)
in the Balance Sheet till the liability for income tax to be paid is known.
208
Schedules Forming Part of Revenue Account
Current Previous
Year (Rs.) Year (Rs.)
Direct Re-insurance
(Rs.) (Rs.)
Premiums Received 24,00,000 3,60,000
Add: Premiums Receivable
Outstanding on 31.3.2018 1,80,000 28,000
25,80,000 3,88,000
Less; Receivable on 1.4.2017 1,20,000 21,000
24,60,000 3,67,000
Total Premium (Rs.24,60,000 + 28,27,000
Rs.3,67,000)
Less: Premium Paid 2,40,000
Add: Payable on 31.3.2018 42,000
2,82,000
Less: Payable on 1.4.2017 20,000 2,62,000
Total Premiums Earned (Net) 25,65,000
Change in Provision for Unexpired
Risk (Rs.26,93,250 – Rs.26,50,000)
Figure of Rs.26,93,250 is calculated
after 5% of additional reserve i.e.
105% of Rs.25,65,000 total
premiums earned)
(-43,250)
25,21,750
Schedule 2 – Claims Incurred NET

Current Previous
Year (Rs.) Year (Rs.)
Claims Paid 16,50,000
Direct Business 1,25,000
Add: Reinsurance Accepted 20,000
17,95,000
Less: Reinsurance Claims Received 1,00,000
16,95,000
Add: Claims Outstanding on 31.3.2018:
Direct 1,75,000
Reinsurance 22,000 1,97,000
18,92,000
Less: Claims receivable on 31.3.2018 12,000
18,80,000
Less: Claims Outstanding on 1.4.2017
Direct 95,000
Reinsurance 13,000
1,08,000
Less: Recoverable from insures on 1.4.2017 9,000
99,000
Total Claims Incurred (Net) 17,81,000
209
Schedule 3 – Commission Paid
Current Year Previous

(Rs.) Year (Rs.)
Commission Paid (Direct) 1,50,000
Add: Commission on Reinsurance Accepted 11,000
1,61,000
Less: Commission on Reinsurance Ceded 14,000
Net Commission 1,47,000
Schedule 4 – Operating Expenses Related to Insurance Business
Current Year Previous

(Rs.) Year (Rs.)
Salaries 2,60,000
Rent, Rates and Taxes 18,000
Printing and Stationery 23,000
Legal Charges 40,000
Bad Debts 5,000
3,46,000
Illustration 3
From the following particulars of Star Insurance Company Ltd., prepare
separate revenue account for fire and marine business and profit and
loss account for the year ending 31.03.2018 and balance sheet as on
that date:
Investments 4,06,980 Share capital 4,00,000
Freehold premiums 3,06,412 (4,000 share of Rs.100 each)
Leasehold 12,604 Claims admitted but not paid:
Agent’s balance 46,212 Fire 4,620
Sundry debtors 17,918 Marine 9,808
Income tax on interest and Due to reinsurance:
dividend 4,513 Fire 2,471
Claims paid and outstanding: Marine 4,143
Fire 1,02,412 Interest & Dividends 19,512
Marine 2,61,512 Other receipts 807
Expenses of management: Premium received:
210
Fire 96,512 Fire 3,56,418
Marine 1,42,218 Marine 8,59,960
Commission: Creditors 44,962
Fire 34,921
Marine 62,857
Interest accrued 919
Office furniture 14,761
Preliminary expenses 90,212
Cash and bank balance 1,01,738
17,02,701 17,02,701
Provision for unexpired risk is to be made at 50% of premium received

for fire insurance business and 100% of premium received for marine
business.
Solution
Fire (Rs.) Marie (Rs.)
Schedule 1 : Premium Earned (Net):
Premium received 3,56,418 8,59,960
Less: Adjustment for increase in reserve for unexpired
Risks (1,78,209-0) 1,78,209 8,59,960
1,78,209 ---
Schedule 2: Claims Incurred (Net):
Claims paid and outstanding 1,02,412 2,61,512
1,02,412 2,61,512
Schedule 3: Commission :
Commission paid 34,921 62,857
34,921 62,857
Schedule 4: Operating Expenses Relating to
Insurance Business:
Expenses of management 96,512 1,42,218
96,512 1,42,218
Schedule 5: Share Capital:
Share Capital 4,00,000 --
4,00,000
Schedule 8: Investments:
Investments 4,06,980
4,06,980
Schedule 10: Fixed Assets:
Freehold premises 3,06,412
Leasehold 12,604
Office furniture 14,761
211
3,33,777
Schedule 11: Cash and Bank Balances:
Cash and bank balance 1,01,738
1,01,738
Schedule 12: Advances and Other Assets:
Agent’s balance’s 46,212
Sundry debtors 17,918
Interest accrued 919
65,049
Schedule 13: Current Liabilities:
Claims admitted but not paid:
Fire 4,620
Marine 9,808
Sundry creditors 44,962
Due to reinsurance
Fire 2,471
Marine 4,143
66,004
Schedule 14: Provisions:
Reserve for unexpired risks (1,78,209+8,59,960) 10,38,169
10,38,169
Schedule 15: Miscellaneous Expenditure:
Preliminary expenses 90,212
90,212
Form B – RA
Star Insurance Company Limited
Revenue Account for the year ended 31.03.2018
Particulars Schedule Fire (Rs.) Marine
(Rs.)
Premium earned (Net) 1 1,78,209 --
Total A 1,78,209 --
Claims incurred (Net) 2 1,02,412 2,61,512
Commission 3 34,921 62,857
Operating expenses relating to
insurance business 4 96,512 1,42,218
Total B 2,33,845 4,66,587
Operating Profit / Loss C = A – B -(55,636) -(4,66,587)
212
Form RA – PL
Profit and Loss Account for the year ended 31.03.2018
Particulars Rs.
1. Operating Profit / Loss:
Fire Insurance -(55,636)
Marine insurance -(4,66,587)
2. Income from investments:
Interest and dividend 19,512
Less: Tax thereon 4,513 14,999
3. Other Incomes:
Other receipts 807
Total A -(5,06,417)
Form B – BS
Balance Sheet as on 31.3.2018
Particulars Schedule Amount Amount
(Rs.) (Rs.)
Sources of Funds
Share capital 5 4,00,000
Total 4,00,000
Investments 8 4,06,980
Fixed assets 10 3,33,777
7,40,757
Current Assets
Cash and bank balance 11 1,01,738
Advances & other assets 12 65,049
Total A 1,66,787
Current Liabilities 13 66,004
Provisions 14 10,38,169
Total B 11,04,173
Net Current Assets (A – B) -(9,37,386)
Miscellaneous expenditure 90,212
Debit balance in profit and loss account 15 5,06,417
Total 4,00,000
LET US SUM UP
General Insurance Company may be doing more than one business, i.e.
fire, marine etc. For each type of business, a separate revenue account
is to be prepare in the prescribed form. To cover the risk unexpired at
the end of the accounting period, a reserve for unexpired risk is made at
50% of net premium in case of fire business, and 100% in case of
213
marine business. A combined balance sheet is also prepared in the
prescribed from for all business on the closing date of the year.
CHECK YOUR PROGRESS
1. Income Tax on interest, dividend and rent should be
a) Debited to profit and loss account
b) Debited to profit and loss appropriation account
c) Debited to provision for taxation
2. Survey expense for fire insurance must be
a) Added to management expenses
b) Shown as a separate item in revenue account
c) Added to claims
3. Valuation balance sheet is prepared by
a) Life Insurance Company
b) Marine Insurance Company
c) General Insurance Company
4. In case of marine insurance, provision against unexpired risk should
be
a) 100% b) 40%
c) 50% d) None of the above
5. During a year, a general insurance company has the following
details.
Premium received Rs.500 lakhs
Premium on reinsurance accepted Rs.100 lakhs
Premium on reinsurance ceded Rs.200 lakhs
The amount of premium to be credited to revenue a/c
a) Rs.500 lakhs b) Rs.600 lakhs
c) Rs.700 lakhs d) Rs.400 lakhs
GLOSSARY
Bonus in reduction : Instead of paying bonus in cash, the insurer,

of premium may deduct the bonus from the premium
due from the insured
Commission on : In order to share the risk, a company may

reinsurance pass some business to the other company
accepted and share the premium also. In that case, it
will get a commission on the premium
214
shared.
Commission on : When a company accepts some business

reinsurance ceded from another company is required to pay
commission on reinsurance business
accepted, which is known as commission on
reinsurance ceded.
Reinsurance : When a company accepts a business for

more value and in order to reduce the risk,
may pass on some business to the other
company, it is called ‘Reinsurance’.
SUGGESTED READINGS

New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. General Insurance Company Accounts |Part-3|Fire Insurance
Revenue Account|Dr.T.K.Avvai Kothai. - YouTube
2. General Insurance Company Accounts | Part-4 | Marine Revenue
Account |-Dr.T.K.Avvai Kothai - YouTube
3. General Insurance Accounts |Part-1| Introduction |Reserve for
Unexpired risk | -Dr.T.K.Avvai Kothai - YouTube
4. Insurance Company Accounts | Part-6 | Simplified format of
Balance Sheet | - Dr.T.K.Avvai Kothai - YouTube
1.d) 2.c) 3.a) 4.a) 5.d)
215
BLOCK 4
DOUBLE ACCOUNTING SYSTEM
UNIT 12 : DOUBLE ACCOUNTING SYSTEM – BASIC

CONCEPTS
UNIT 13 : DOUBLE ACCOUNTING SYSTEM – ACCOUNTS

OF ELECTRICITY COMPANIES
216
UNIT 12
DOUBLE ACCOUNTING SYSTEM – BASIC
CONCEPTS
STRUCTURE
Overview
Learning Objectives
12.1 Introduction
12.2 Double Account System – Meaning
12.3 Special features of Double Accounts System

12.4 Differences between Single Account System and Double
Account System
12.5 Advantages of Double Account System

12.6 Disadvantages of Double Account System
12.7 Difference between Double Entry System and Double
Account System
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Public utility companies, like railways, electricity companies, water etc.,
are usually operating under Special Acts of parliament, enjoy
monopolistic rights in their business. These undertakings require a huge
amount of capital which is mostly fixed, i.e., cannot be got back. Since
this capital in raised from public, such companies are morally bound to
give full information to the public i.e., how the capital was raised and
how the amount of capital was utilized.
LEARNING OBJECTIVES

• explain the meaning of the term ‘single account’ and ‘double
account’ systems.
217
• describe the special features of double account system.
• point out the advantages and disadvantages of double
account system.
12.1 INTRODUCTION
So far, we have adopted a single account system of presenting annual
financial statements (final accounts). It is a system where annual
financial statements include trading and profit and loss account and one
balance sheet. Single account system must not be confused with single
entry system. Single entry system is a defective double entry system
while single account system only says that annual financial statements
of a firm include one balance sheet. Thus, a firm, whether having double
entry system or single-entry system, is said to have single account
system if puts forth one balance sheet while presenting its annual
Double Account System is a system of presenting annual financial

statements, where a firm prepares two balance sheets instead of one.
12.2 DOUBLE ACCOUNT SYSTEM – MEANING
The Double Account System is merely a method of presentation of final
accounts. In double account system, the balance sheet is not presented
in the conventional form but spilt up into two parts – the Capital Account
and the General Balance Sheet. The way of presenting the balance
sheet in two parts is called Double Account System.
Again, double account system must not be confused with double entry
system. Double entry system is the system of recording transactions in
books while double account system is the system of presenting annual
financial statements. A firm presenting its annual statements on double
account system keeps its books of accounts on double entry system.
Double account system is used in England by public utility organizations
such as railways, electricity, water and gas undertakings. These public
utilities enjoy monopolistic rights in their business of rendering service to
the community. There are special Acts of Parliament regulating such
business and the Acts also provide the manner in which these
undertakings will have to present the account.
12.3 SPECIAL FEATURES OF DOUBLE ACCOUNT SYSTEM
1. The details regarding current assets and current liabilities are
separately dealt with. This is done by splitting the balance sheet
into two sections: (a) Statement of receipts and expenditure on
capital account, and (b) General balance sheet. The balance of
218
the first statement i.e., capital account, is carried to the general
balance sheet. It is because of this feature that this system is
called ‘Double Account’ system. It should, however, be
understood that accounting is kept on the principles of double
entry book-keeping only.
2. Profit and loss account is renamed as revenue account and profit
and loss appropriation account as net revenue account.
3. Depreciation is not shown as a deduction from fixed assets. Thus
fixed assets are shown at original cost plus additions during the
year and depreciation is provided by creating reserves and other
funds which appear on the liability side of the general balance
sheet.
4. General reserves, sinking fund, depreciation fund, investment
fluctuation fund, balance of net revenue account, capital reserve
are shown in the general balance sheet on the liability side.
5. Loans and debentures are treated as capital and shown in the
capital account. Consistent with this procedure interest on loans
and debentures is debited to Net Revenue Account as an
appropriation of profits.
6. Discount and premium on issue of shares and debentures are
permanently retained as capital items.
7. Renewals are provided for out of current revenue.
8. The capital account shows the total expenditure to date on
assets which may or may not be in existence at the date of the
account.
9. The published accounts are accompanied by voluminous
statistical returns and statements.
10. In the capital account and also the general balance sheet the
prefixes ‘to’ and ‘by’ are used.
12.4 DIFFERENCES BETWEEN SINGLE ACCOUNT SYSTEM AND

DOUBLE ACCOUNT SYSTEM
1. All transactions under the double account system are recorded
on the same principles of double entry as are followed by any
undertaking keeping its accounts under the single account
system. It is only in the presentation of final accounts to the
public that the double account system differs from the single
account system. Under the single account system only one
balance sheet is prepared in the form of a statement of assets
and liabilities but under the double account system the balance
sheet is prepared and presented in two parts, viz., capital
account and general balance sheet.
219
2. The main purpose of preparing the balance sheet under single
account system is to show the financial position of the concern
on a particular date but in the case of double account system the
main purpose is to show the amount of capital received and how
the same has been invested in fixed assets.
3. Under single account system assets are shown in the balance
sheet after deduction of depreciation from the concerned assets.
Under double account system the fixed assets are always shown
in the capital account at their original cost without deducting any
depreciation there from. They are not written down in the books
year after year. Depreciation on these assets is however,
provided for by charging the amount of depreciation to revenue
account every year and crediting to the depreciation fund
account. The depreciation fund is invested in outside securities,
which are treated as depreciation fund investments. The
depreciation fund and the corresponding investments are shown
in the general balance sheet.
4. Under the single account system, the revenue accounts are
called the profit and loss account and the profit and loss
appropriation account. They take the form of revenue account
and net revenue account respectively under the double account
system.
12.5 ADVANTAGES OF DOUBLE ACCOUNT SYSTEM
1. The capital account is in the nature of cash account. It readily

discloses the sources of capital and the manner in which the
capital is used in the form of assets and the cash balance left.
The account is easily understood even by persons who do not
have special knowledge of accounting.
2. Depreciation fund is compulsorily created and invested in
securities. This helps in the replacement of assets without
affecting cash resources of the undertaking.
3. Public utility concerns which adopt the double account system
enjoy monopoly rights granted by the State. The prescribed form
of presentation of accounts enables the State to ensure that the
concern renders the most efficient service at reasonable cost.
4. Revenue account is concerned purely with the operating
activities of the undertaking. All items which are extraneous to
the actual working of the concern are taken to the net revenue
account.
220
5. The standardization of the form in which the accounts are
published enables the undertaking to compile easily many
statistical returns reflecting the services rendered to the public.
12.6 DISADVANTAGE OF DOUBLE ACCOUNT SYSTEM
The double account system comes in for criticism on the following
grounds:
1. All assets are shown in the capital account at cost and hence the
balance sheet does not reveal the true position. It may be stated
in reply to this criticism that while the assets remain at cost, a
depreciation fund is built up to cover obsolescence and wear and
tear of the assets.
2. The capital account includes expenditure on promotion of
parliamentary bills and preliminary expenses. This holds good in
the case of single account system also.
3. Capital account includes assets having very short life. Such
assets appear in the account even after they are reduced to
scrap value.
4. The repairs and renewals are charged to revenue account of the
same period in which they are incurred. This involves little or no
expenditure in some years and vey heavy expenditure in others.
Therefore, each year’s profits and losses are incorrectly stated.
In order to equalize the burden to revenue over the different
years, some undertakings maintain a repairs and renewals
reserve. Particular attention to this question should be paid in the
early years of the undertaking because actual renewals will be
very small during such periods.
5. It is not always possible to calculate exactly the amount to be
charged to revenue on replacement of an asset by the
construction of a new and improved asset.
12.7 DIFFERENCE BETWEEN DOUBLE ENTRY SYSTEM AND

DOUBLE ACCOUNT SYSTEM
The fundamental principles of double entry are also applicable to double
account system upto the preparation of trial balance. It is only the way of
presenting the final accounts under the double account system that draw
a distinction between double entry system and double account system.
Double entry is a method of bookkeeping while double account system
is only a method of presentation of final accounts.
221
LET US SUM UP
Double Account System is a special form of final accounts in greater
detail, accompanied by a number of statistical statements. Balance
sheet under this system is prepared and presented in two parts i.e.
capital account and General Balance Sheet. Under single account
system only are balance sheet is presented. Anyhow, double account
system has its own merits and demerits.
CHECK YOUR PROGRESS
1. The profit and loss account under double account system is terms as
_________
a) Revenue account b) Income & Expenditure account
c) Profit and Loss account d) None of the above
2. The way of presenting the balance sheet in two parts is called the
________
a) Single account system b) Double account system
c) Double entry system d) None of the above
3. Double Account System is applied to _______
a) Holding companies b) Banking companies
c) Public utility concerns d) None of the above
4. The essential features of the double account system is __________
a) for every debit there is a corresponding credit
b) The presentation of capital receipts and capital expenditure in
a separate account.
c) The presentation of assets at original cost, the depreciation to
be shown to the credit of depreciation reserve account
d) all the above
5. Under double account system, depreciation is ________
a) credited to the assets account
b) credited to the depreciation reserve account
c) debited to revenue account
d) debited to net revenue account
GLOSSARY
Single Account System : Under single account system, profit and

loss account, profit and loss appropriation
account and only one balance sheet are
prepared.
Revenue Account : Under double account system, instead of
222
profit and loss account, revenue and net
revenue accounts are prepared.
Net Revenue Account : It is similar to the profit and loss

appropriation account of a trading
concern.
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Double Account System| Problem & Solution in Electricity
Company|Part-1 Video| Explained in TamilBR - Bing video
2. Problem in Double Account System| Video 4| Electricity
Company|Corporate Accounting-II |TamilBR - Bing video
1.a) 2.b) 3.c) 4.d) 5.b)
223
UNIT 13
DOUBLE ACCOUNTING SYSTEM –

ACCOUNTS OF ELECTRICITY
COMPANIES
STRUCTURE
Overview
Learning Objectives
13.1 Final Accounts of electricity companies
13.1.1 Revenue account

13.1.2 Net Revenue account
13.1.3 Capital account
13.1.4 General balance sheet

13.2 Specimen of final accounts of electricity companies
13.3 Financial Provisions affecting accounts
13.4 Reasonable return and Disposal of Surplus

13.4.1 Reasonable return
13.4.2 Capital base
13.4.3 Clean profit
13.4.4 Disposal of surplus
13.5. Repairs and renewal
13.6 Replacement of an asset

13.7 New forms
Let us sum up
Check your progress
Glossary
Suggested Readings

OVERVIEW
The business of electricity supply being a public utility is controlled by
the government. The industry in the hands of the government local
224
authorities and public companies. The business of electricity supply in
subject to two acts of Literature i.e. Indian Electricity Act 1910 and the
Electricity (supply) Act 1948. It should be noted that the published
accounts of electricity companies are to be drawn up in accordance with
the requirements of the Companies Act 2013. According to Rule 26 of
Indian Electricity Rules 2013, the accounting year of the electric supply
companies must end on 31st March.
LEARNING OBJECTIVES
• prepare final accounts of electricity companies in the forms
prescribed under the Indian electricity rules.
• determine reasonable return, ascertainment of surplus, and
its disposal.
• explain the various funds to be maintained, such as
contingency reserve fund, development reserve, tariff and
dividends control reserve etc.
• describe the procedure to be followed while replacing an
asset.
13.1 FINAL ACCOUNTS OF ELECTRICITY COMPANIES
Every electricity supply company shall prepare its accounts to 31st March
and shall render them to the state government within six months from
the date. The final accounts prepared under this system normally
comprise 1. Revenue account 2.Net Revenue account 3. Capital
account and 4. General Balance sheet.
13.1.1 Revenue Account
It is like the ordinary profit and loss account of any trading concern,
showing on the debit side all items of expenditure and showing on the
credit side all items of income. It may be noted that depreciation is
debited to revenue account and credited to the depreciation fund
account and not to the asset account concerned.
13.1.2 Net Revenue Account.
It is similar to the profit and loss appropriation account of a trading
concern with the exception that interests on loans and debentures are
shown on the debit side of the net revenue account as if they are
appropriations out of profits. Such a treatment is given because
debentures and loans are considered as a part of the capital of the
concern and shown in the capital account along with fixed assets. This is
in contrast to the practice followed in trading concerns where interest is
225
considered as a charge against profits and hence debited to profit and
loss account.
13.1.3 Capital Account
The main purpose of this account is to show the total capital and its
sources and application of this capital in the investment of fixed assets
for the purpose of carrying on the business of the undertaking. It is also
called the receipts and expenditure on capital account. It discloses the
receipts from the issue of shares, debentures and loans and expenditure
out of such receipts on the acquisition of and additions to fixed assets.
The capital account is prepared in a columnar form with three columns
on either side. On the receipts side the first column indicates the receipts
up to the time of the commencement of the accounting period, the
second column shows the receipts during the period and the last column
adds up the total receipts. Likewise, expenditure is shown in three
columns on the payments side.
Preliminary expenses on formation are treated as capital expenditure
and shown on the expenditure side of the account. Premium received on
issue of shares and debentures is shown on the receipts side. The
discounts on issue of shares and debentures are deducted from the
proceeds of such issue and only the net amount is shown. The balance
of the capital account is carried down and shown as a separate item in
the general balance sheet. In the case of electricity supply companies,
the total capital receipts and the total capital expenditure are shown in
the General Balance Sheet instead of only the balance.
13.1.4 General Balance Sheet
The general balance sheet displays the balance of capital account on
the appropriate side and the current assets and liabilities. In the case of
electricity supply companies total of the expenditure as per capital
account is shown on the assets side and the total of receipts is shown
on the liabilities side. It is drawn up in the usual form showing on the left-
hand side the reserves, depreciation fund, current liabilities and other
credit balances and on the right-hand side the floating assets and other
debit balances.
226
13.2 SPECIMEN OF FINAL ACCOUNTS OF ELECTRICITY COMPANY
Capital account or receipts & Expenditure on capital account
Receipts during the

end of the previous
Expenditure during
Receipts up to the
Expenditure up to
Total Expenditure
the end of the
previous year
Total receipts
the year
year
Expenditure Receipts
To preliminary expenses By Equity shares
To land By preference shares
To building By debenture
To plant By loan
To mains By call in advance
To transformers motors etc By other Receipts
To meters Total receipts
To general stores By balance of capital
To special items Account carried to general

balance sheet
Total expenditure
To balance of capital Account

carried to general balance
sheet
General balance sheet displays the balance of the capital account on the
appropriate side and the current assets and current liabilities. A
specimen form of general balance sheet is given as under:
General Balance Sheet
Capital account (balance Capital account (balance

carried forward from capital carried forward from
account) capital account)
Sundry creditors for capital Stores in hand
account
Sundry debtors
Sundry creditors on open
Cash at bank
account
Cash in hand
Net revenue account
Securities
Reserve fund
Special items
Depreciation fund
Special items
227
(4) Revenue account is prepared in lieu of statement of profit and loss;
similarly net revenue account is prepared in lieu of surplus account. A
specimen from of Revenue account is given a under.
Revenue Account of Gas Company
For the year ending
A. Generation By sales of gas for

1. To fuel domestic use
2. To Oil, wastage, water etc By sales of gas
3. to salary of engineers commercial use
4. To wages and gratuities By sales of gas under
5. To repairs and maintenance special contracts
By rent receivable
By transfer fees
B. Distribution By other items

1.To salary of engineers By misc. Receipts
2.To wages & gratuities By sale of Cylenders
3. To Repairs and maintenance By Reconnection and
disconnection fees
C.Gas Cylenders cost

1.To attendance and repairs
2. To repairs
D. Rent, rates and taxes

1. To rent payable
2. To rates and taxes
E. Management expenses
1. To directors remuneration
2. To General establishment
3. To Auditors of the company
F. Law charges
1. To Law charges
G. Depreciation
1. To Lease
2. To Building
3. To Plant
4. To Mains
5, To Meter. Etc
H. special charges
228
1. To bad debts
2. To balance carried to Net
revenue a/c
The specimen form of net Revenue Account is given as under

Net Revenue Account
For the year ending
To balance of last year’s A/c By balance from last A/c

Interest on security deposits By balance brought from
Revenue A/c
Interest on fixed loans
Interest on bank A/c
Contingency Reserve
By Balance carried to general
Reserve for Rebate to
balance sheet
consumers
Dividend control reserve
Carried to General
Balance sheet
(5) The fixed asset is not shown in the general balance sheets. They
appear in the capital account at cost and not at depreciated value.
Depreciation Fund is created and shown in the general balance sheet as
these companies require a huge amount for replacement of their assets.
(6) Other reserves such as general reserve, investment fluctuation
reserve are also shown in the general balance sheet on the liabilities
side.
(7) Interests on debentures and loans are shown in the net revenue
account.
(8) Usually, there is no adjustment of assets value in the capital account.

(9) Discounts and premiums are permanently retained as capital items.
(10) Loans and debenture are treated on capital and shown in capital
account.
(11) Renewals are provided out of current revenue.
229
Illustration -1
From the following balances as on December 31, 2000 appearing in the
ledger of the electric light and power co ltd., you are required to prepare
(a) revenue account (b) net revenue account (c) capital account and (d)
general balance sheet.
Rs. Rs.
Equity shares 54,900 Stores on hand 700
Debentures 20,000 Cash 300
Lands on 31.12.1999 15,000 Cost of generating electricity 3,000
Lands purchased 500 Cost of distributing electricity 600

during 2000
Machinery on 31.12.1999 60,000 Rent, rates and taxes 400
Machinery purchased 500

during 2000
Mains including cost of 20,000 Management expenses 1,200

laying 31.12.1999
Depreciation 2,000
Spent on mains during 2000 5,100 Sale of current 13,200
Rent of meters 300
Sundry creditors 100 Interest on debentures 1,000
Depreciation fund 25,000 Dividends 2,000
sundry debtors for current 4,000 Balance of net revenue account 2,850
Supplied 31.12.199
Other debtors 50
Solution
Revenue Account
For the year ended December 31, 2000
Rs. Rs.
To cost of generating electricity 3,000 By sale of current 13,200
To cost of distribution of 600 By rent of meters 300
electricity
To rent rates and taxes 400
To management expenses 1,200
To depreciation 2,000
230
To balance carried to net 6,300
revenue account
13,500 13,500
Net Revenue account

For the ended December 31, 2000
Rs. Rs.
To interest on debenture 1,000 By opening balance b/d 2850

To dividends 2,00 By Revenue account, 6,300
profit made during the
year
To balance carried to general 6,150
balance sheet
9,150 9,150
Receipts and expenditure on capital account

For the year ended December 31, 2000
Receip
Expenditu Expendit ts
ure Total Receipts up
re up to Total Receipts
during expenditure to the end of during
Expenditure the end of Receipts
the year previous the Rs
previous Rs year year
year Rs.
Rs
To land 15,000 500 15,500 By equity capital 54,900 - 54,900
To Machinery 60,000 500 60,500 By Debentures 20,000 - 20,000
To mains 20,000 5,100 25,100 74,900 74,900
By balance 26,200
Total 95,000 6,100 1,01,100 Total 74,000 - 1,01,100
General Balance sheet

As on December 31,2000
Rs. Rs.
Capital account amount 74,900 Capital account amount 1,01,100
received spent
Sundry creditors 100 Stores on hand 700
Net revenue account 6,150 Sundry debtors for current 4,000
supplied
Depreciation 25,000 Other debtors 50
Cash 300
231
1,06,150 1,06,150
Illustration 2 :
Following is the Trial Balance of the social Electrical Lighting Co.Ltd. for
the year ended March 31,2018:
Dr Cr
Nominal capital 1000 shares of 50 each
Subscribed – 5,000 shares, 25 paid 1,25,000
Debentures 6% interest 75,000
Depreciation fund 5,000
Calls in arrears 5,000
Freehold land 46,500
Buildings 25,000
Machinery at station 50,000
Mains 40,000
Transformers, Motors, etc 10,000
Meters 7,500
Electrical Instrument 2,000
General stores (cables, mains, etc.) in stock 11,750
Officer Furniture 1,250
Coal and fuel 9,500
Oil waste and engine room stores 3,750
Coal oil waste, etc. in stock 500
Repairs and replacements 2,500
Rates and taxes 1,500
Salaries of secretary, manager etc 7,500
Wages at station 15,000
Directors fees 5,000
Stationery printing and advertising 3,000
Incidental expenses 500
Law charges 1,000
Sales of meters 43,750
Sales by contracts 25,000
Meter rents 1500
Sundry creditors 5000
Sundry debtorss 15,000
Cash in hand and at banks 16,500
2,80,250 2,80,250
232
(1) Provide depreciation on opening balances:
1 1
Building 2 %; Machinery 7 %; Mains 5%; Transformers etc.
2 2
10%; Meters 15%.
(2) A call of Rs. 5 per share was payable on 30th September, 2017
and arrears are subject to interest at 5 per cent annum. Prepare
Revenue amount and Capital Account for the year ended March
31, 2018 Balance Sheet as on that date. When the accounts are
maintained under the double account systems.
Solution
Revenue Account
for the year ended March 31, 2018
Rs. Rs.
To Coal and fuel 9,500 By Sales of meters 43,750
To Oil, waste and engine room stores 3,750 By Sales by contracts 25,000
To Salaries 7,500 By Meter rents 1,500
To wages 15,000
To Directors’ fees 5,000
To Stationery, etc. 3,000
To Incidental expenses 500
To Law charges 1,000
To Rates and taxes 1,500
To Repairs and replacements 2,500
To Depreciation :
Building 500
Machinery 2,250
Mains 1,250
Transformers 500
Meters 375 4,875
To Balance carried forward to general 16,125
Balance sheet
70,250 70,250
Receipts and Expenditure on Capital account
for the year ended March 31, 2018

Expenditure Receipts at
Expenditure Receipts
at the end Total the end of Total
Expenditure during the Receipts during
of previous Expenditure previous Receipts
year the year
year year
To Freehold By Share
land 46,500 - 46,500 capital 1,00,000 20,000 1,20,000
By
To Building
20,000 5,000 25,000 Debentures 75,000 - 75,000
To Machinery at
station 30,000 20,000 50,000
233
To Mains 25,000 15,000 40,000
To
Transformers
Motors, etc. 5,000 5,000 10,000
To Meters 2,500 5,000 7,500
To Electrical
Instruments 1,500 500 2,000
To General
Stores (Mains,
etc.) 8,000 3,750 11,750
To Office
Furniture 1,250 - 1,250
Total
Expenditure 1,39,750 54,250 1,94,000 1,75,000, 20,000 1,95,000
General Balance Sheet

Capital Account 1,95,000 Capital Account 1,94,000
Sundry Creditors 5,000 Coal, Oil waste etc., in Stock 500
Net Revenue (Rs.16,125 +Rs.125) Sundry Debtors 15,000
(interest on calls in arrears) 16,250 Cash in hand and at bank 16,500
Depreciation Fund: Interest receivable on calls in

arrears 125
Balance 5,000 @ 5% p.a. for 6 months
Add : for 2017-18 4,875 9,875
2,26,125 2,26,125
13.3 FINANCIAL PROVISIONS AFFECTING ACCOUNTS

Depreciation: There are Two methods of depreciation.
i) Compound interest Method. ii)Straight line method.
1. Under compound interest method an amount which together with
4%. interest will amount to 90% of the cost is to be provided over
the life of the asset. The estimated life of the asset is given in the
Sixth Schedule. If this method is followed interest at the rate of
4% per annum on the opening balance of depreciation reserve
must be transferred from the Revenue Account to the
Depreciation Reserve Account, the interest will be treated as an
expense.
2. Under the straight-line method, 90% of the cost of the asset is
written off over the estimated life of the asset.
234
3. No depreciation is to be provided when 90% of the cost of the
asset in written off or the asset ceased to be available due to
obsolescence, inadequacy, superfluity or any other reason.
4. All sums credited to depreciation reserve are to be invested in
the undertaking itself or for the repayment of such loans which
are not guaranteed under sec.66 of the Act.
Contingency Reserve Fund: All electricity companies are required to
maintain a contingencies reserve to meet the following items and any
other items as may be approved by the Central Government:
(a) Expenses on replacement or removal of plant or works, other than
expenses normally
required for maintenance or renewal.
(b) Expenses or loss of profits arising out of accident, strikes or other
fortuitous
circumstances which the management cannot avoid.
(c) Any compensation payable legally for which there is no other
provision.
The reserve is built by making annual appropriations from the
revenue account. The amounts appropriated may vary from 0.25% to
0.5% of the original cost of the fixed assets and the reserve itself should
not exceed 5% of the original cost of the fixed assets. The amount is
required to be invested in trust securities.
Appropriations
General Reserve. Under Sec. 67 of the Act a general reserve can be
created which should not exceed 8% of the original cost of the assets.
Annual contribution can be made after providing for interest and
depreciation and the amount appropriated should not exceed ½ % of the
original cost of the fixed assets.
Development Reserve. An amount equal to the amount of income tax
which would have been paid but for the development rebate allowed by
IT. authorities has to be transferred to the 'Development Reserve
Account If in any accounting year, the clear profit including the special
appropriation together with the balance in the Tariff's and Dividends
Control Reserve account falls short of the reasonable return, the
appropriation to this reserve can be reduced by the amount of shortfall.
This reserve is to be invested in the same undertaking and handed over
to the purchaser of business on the sale of undertaking
235
13.4 REASONABLE RETURN AND DISPOSAL OF SURPLUS
In order to avoid exploitation of consumers by the electricity
undertakings, certain provisions have been made in the Act. According
to Para 1 of the Sixth Schedule, electricity companies have to so adjust
their rates that their clear profit in any year does not exceed the
reasonable return by more than 20%. The terms reasonable return and
clear profit have been clearly defined in the Schedule.
13.4.1 Reasonable Return. Reasonable Return. It is the sum of the
following:
1. An yield which is equal to bank rate plus two per cent on the capital
base
2. Income from investments excluding Investments against
contingency reserve.
3. An amount at ½ % on loan by the state electricity boards.
4. An amount at ½ % on amounts borrowed from approved institutions.
5. An amount at ½ % on debentures issued.
6. An amount at ½ % on the balance of Development Reserve.
13.4.2 Capital Base: Procedure for calculating capital base is given
below:
Rs. Rs.
1. Original cost of the fixed assets available ……….
Less ; Cost of service lines contributed by ………. ……….

consumers
2. Cost of intangible assets
3. investments made compulsorily on account of ……….

contingency reserve
4. Original cost of W.I.P. ……….
5. Working capital being the monthly average of ……….

stores, materials, cash and bank balance.
Total
Less:
1. Depreciation on tangible assets and amounts ……….

written off from the intangible assets
236
2. Loans advanced by electricity boards ……….
3. Security deposits of customers held in cash ……….
4. Debentures issued by the company ……….
5. Loans borrowed from approved institution ……….
6. Balance in the Traiffs and Dividends control ……….

reserve
7. Balance in the Development reserve ……….
8. Balance in the Consumer benefits reserve ……….
Capital Base
13.4.3 Clear Profit. It is the difference between the amount of income

and expenditure and reduced by the specific appropriations. The layout
of items for calculating this figure is given below:
Income derived from
Rs. Rs.
1. Receipts from sale of energy less discount ……....
2. Rental of meters, etc. ……...
3. Sales and repair of lamps ……...
4. Rent ……...
5. Transfer fees ……...
6. Interest from investments, fixed and call ……….

deposits and bank balances
7. Other taxable receipts ………
Less: Expenditure incurred on
1. Generation and purchase of energy ………..
2. Distribution and sale of energy ……….
3. Rents, rate and taxes …………
4. Interest on loans ………..
5. Interest on security deposits ………..
6. Bad debts ……….
237
7. Audit fees ……….
8. Management ………..
9. Depreciation …………..
10. Other admissible expenses for tax ……….

purposes
11. Contribution to P.F., Gratuity, etc. ……..
12. Bonus to employees ……….
Less : Special appropriations
1. Past losses …………
2. Taxes on income and profit …………
3. Amounts written off from intangibles ………..
4. Contributions to contingency reserve ………….
5. Contributions towards arrears of …………..

depreciation
6. Contributions to development reserve …………
7. Other special appropriations permitted by …………….. ………..

the state government.
Balance, being clear profit ………..
13.4.4. Disposal of Surplus. If the clear profit of an electricity company

exceeds the reasonable return, the excess of clear profit over
reasonable return must be disposed as follows:
i. One-third of the surplus but not exceeding 5% of the

reasonable return will be at the disposal of the undertaking
as a reward for its efficiency.
ii. Of the balance one-half will be transferred to the tariffs and
dividends control reserve.
iii. The balance left will be distributed among the consumers by
way of reduction in rates or by way of special rebate.
Pending such distribution, the amounts will be credited to a
'consumers' benefit reserve.
Tariffs and dividends control reserve can be utilised for payment
of dividends during years when clear profit is less than the reasonable
return. The balance in this account must be handed over to the
238
purchaser at the time of sale of the undertaking. An electricity company
must regulate its rates suitably so that the clear profit in any year does
not exceed the reasonable return by more than 20% of such return.
Restriction on Dividends. Except with the previous consent of the
State Government, no sum shall be carried forward to a reserve and no
dividend in excess of 3% shall be paid on share capital and no other
distribution of profits shall be made to the shareholders in respect of any
year of account so long as any of the following sums remain to be
written off in the books of the undertaking namely,
i) Normal depreciation due for that year of account calculated
in accordance with the provisions of Para VI of Schedule VI
to Electricity (Supply) Act, 1948.
ii) Equated instalment in respect of arrears of depreciation
computed in accordance with the provisions of Para XI of
Schedule VI, for that year of account.
iii) Arrears, if any, in respect of normal depreciation referred to
in clause (i) above.
iv) Arrears, if any, in respect of equated instalments referred to
in clause (ii) above.
illustration 3. The following balances have been extracted from the
books of Kanpur Electricity Company at the end of 2002.
Rs.
Share capital 10,00,000
Reserve fund (invested in 4½ % Government 5,00,000
securities at par)
Contingencies reserve (invested in 5 % state loan) 1,00,000
Loan from state electricity board 6,00,000
8% Debentures 2,00,000
Development reserve 1,00,000
Depreciation reserve on fixed assets 5,00,000
Consumer’ s deposits 5,50,000
Amounts contributed by consumers for fixed assets 10,000
Intangible assets 50,000
Tariffs and dividends control reserves 50,000
Current assets (monthly average) 2,00,000
239
The company earns a profit of Rs.75,000(after tax) in 2002.
Show how the profit is to be dealt with by the company, assuming the
bank rate is 9%.
Solution
Capital base:
Rs.
Less: Depreciation 5,00,000
15,00,000
Intangible assets 50,000
Current assets 2,00,000
Investment against contingency reserve 1,00,000
Total 18,50,000
Less : Loan from state electricity board 6,00,000
Debentures 2,00,000
Development reserve 1,00,000
Consumers deposits 5,50,000
Amounts contributed by consumers for 10,000
fixed assets
Traiff and dividend control reserve 50,000 15,10,000
3,40,000
Reasonable Return:
11% i.e., (Reserve Bank Rate 9% + 2%)
On Rs. 3,40,000 37,400
4 ½ % Reserve Fund investment 22,500
½ % on electricity Board loan, Debenture
and Development reserve. 4,500
64,400
Maximum profit allowed for the company is Rs.64,400 + 20% of

Rs.64,400 i.e. Rs.77,280. The company has earned a profit of
Rs.75,000.
Surplus earned = Rs.75,000 - Rs. 64,400
= Rs. 10,600
240
Disposal of profit including the surplus
(i)To be retained by the company Reasonable returns plus 1/3rd

of the surplus not exceeding
5% of reasonable return.
(10600 x 1/3 =3533 = Rs.64,400+ 3220

64400 x 5% = 3220)
= Rs.67,620
ii)To be transferred to Tariffs and = one –half of the balance

Dividends control reserve
= ½ of (Rs.10,600-3,220)
= Rs.3,690
iii)To be distributed among - The balance i.e.,

consumers by way of reduction of Rs.3,690.
rates or otherwise
Illustration 4
From the following details of an electricity supply company,
maintaining accounts under Double Account system, calculate the
following:
a)clear profit, (b)capital base, (c) reasonable return, and (d) amounts
available for dividends and contribution to tariff and dividend control
reserve and consumer’s rebate reserve.
Rs.
Sale of energy 12,40,000
Meter rents 90,000
Transfer fees 1,000
Costs of generation 6,05,000
Distribution and selling expense 65,000
Audit fees 5,000
241
Intangibles written off 3,000
Management expenses 90,000
Depreciation 60,000
Interest on loan from electricity board 9,000
Contingency reserve investment Income 5,000
Interest on security deposit 1,000
Interest on bank deposit 600
Contribution to Provident Fund 32,000
Original cost of Fixed assets is Rs.27,00,000; contribution by consumers

for acquisition of such fixed assets Rs.2,00,000 cost of intangibles
Rs.50,000; contingency reserve investments Rs.50,000; stores opening
and closing Rs.40,000 and Rs.60,000 respectively; cash and bank
balances –opening Rs.30,000 and closing Rs.50,000.
Depreciation up to the beginning of the year Rs.5,00,000. Intangible
written off up to the beginning of the year Rs.40,000. Security deposit of
customers held in cash Rs.20,000. Tariff and Dividend control reserve –
opening balance Rs.80,000 Development Reserve opening balance
Rs.1,20,000.
Amount carried forward for distribution to consumers Rs.15,000. Loan

from state electricity board Rs.90,000. No new Plant and Machinery was
added in the year. Transfer in the year in the year to contingency
reserve was Rs.8,000. Reserve Bank rate is to be adopted at 8%.
Solution.
(a) Clear Profit
Rs.
Revenue : Sale of energy 12,40,000
Meter Rents 90,000
Transfer fees 1,000
Contingency Reserve Investment income 5,000
Interest on bank deposits 600
Total 13,36,600
242
Less: Operating Expenses:
Cost of generation 6,05,000
Distribution and selling expenses 65,000
Interest on loan from electricity board 9,000
Interest on security deposit 1,000
Audit fees 5,000
Management expenses 90,000
Depreciation 60,000
Contribution to Provident fund 32,000 8,85,000
4.51,600
Less : Special appropriations:
Intangible assets written off 3,000
Transfer to contingency reserve 8,000 11,000
Clear Profit 4,40,600
(b) Capital Base:

Rs. Rs.
5,60,000 Original Cost of
Depreciation written off
43,000 Fixed Assets 27,00,000
Intangible assets written
off
90,000 Less: Contribution 25,00,000
Loan from electricity Board From consumers 2,00,000
80,000 Cost of intangible assets
Tariff and dividend control 50,000
reserve
20,000 Contingency Reserve investments
Security deposit of 50,000
customers
1,20,000 Working capital 90,000
Development reserve
15,000 ½ (40,000+60,000) = 50,000
Amount carried forward for ½ (30,000 + 50,000) =40,000
distribution to consumers
17,62,000
Capital base
26,90,000 26,90,000
243
(c)Reasonable return:
Rs.
1,76,200
(a) Bank rate 8% + 2% = 10% on Capital base
of Rs.17,62,000
600
(b)Add : Investment Income on Bank deposits
450
c) ½ on Bank loan from electricity Board of
Rs.90,000
600
d) ½ on development reserve Rs.1,20,000
1,77,850
(d) Amount available for dividend

Rs.
4,40,600
Clear Profit
1,77,850
Less: Reasonable return
2,62,750
Surplus
1/3rd thereof, viz. Rs.87,583 or 5% or reasonable return, viz,

Rs.8,893 whichever is less. Hence, amount available for dividend
out of current year’s profit is Rs.8,893.
(e)Contribution to :
Rs.
1,26,929
Tariff and Dividend control Reserve
(50% of Rs.2,62,750 – Rs.8,893)
1,26,929
Contribution to Consumers Rebate Reserve-
balance
13.5 REPAIRS AND RENEWALS

Under the double account system, repairs and renewals are charged to
the revenue account in the same year in which they are incurred. The
charge to revenue in respect of repairs and renewals may be different in
different years, though the benefit derived by all the years from the use
of the asset may be more or less the same. The profits in the first few
years may be high since the charge for repairs and renewals during
these years will be negligible. As the asset becomes older the charge for
repairs and renewals will be heavy and hence the profits of later years
will be unduly reduced.
To equalise the burden to the revenue account and to have a uniform
charge to revenue in respect of repairs and renewals, some
undertakings maintain a repairs and renewals reserve or fund. This is
brought into account by debiting the revenue account and crediting the
repairs and renewals reserve account. The amount that is likely to be
244
spent on repairs each year on an average during the life of the asset is
calculated in advance and it is charged to revenue account annually.
The actual repairs are debited to the reserve account and not to the
revenue account. The balance in the repairs and renewals reserve'
account is shown in the general balance sheet.
13.6 REPLACEMENT OF AN ASSET
The distinction between capital and revenue expenditure is very
important in double account system. Whenever there is a question of
replacement of an asset, the problem arises as to what portion of the
expenditure should be charged to capital or revenue expenditure. Under
single accounting system whenever as asset is replaced, old asset is
completely written off and cost of new asset in capitalised but under
double account system the procedure is a little different and given as
under:
(1) The original cost of the asset to be replaced is not disturbed

at all and continues to be shown in the books even after its replacement.
(2) The present estimated cost taking into consideration the
increase in prices of the replacement of old asset is calculated assuming
its cost if this asset is now constructed Out of this estimated cost, the
sale proceeds of old materials and value of material used in new or
auxiliary asset are deducted. The residual amount is charged to the
revenue account.
(3) The difference between the total cost of the work and the
estimated replacement cost (without the further reducing it by the
amount of materials sold) of the old asset is capitalised. If the material
used becomes a part of given total cost, it should be deducted to
calculate net capital charge.
Following journal entries are passed for replacement of an asset:
i. For amount spent on new works
Debit New Works Account (with Capital charge).
Debit Replacement Account (with revenue charge)
Credit Bank Account
ii. For sale of old materials.
Debit Bank Account
Credit replacement account
iii. For the value of old material used in the construction.
Debit New Works Account
Credit Replacement Account
iv. For amount entirely spent on extensions
245
Debit New Works Account
Credit Bank Account
v. For transfer of balance of replacement account to revenue
account
Debit revenue account
Credit Replacement account.
After passing these entries New Works Account and Replacement
account can be prepared. This will be clearer from the following
illustrations:
Illustration 5
National Teleservices Ltd. laid down a line at a cost of Rs.10,00,000.
After a few years the company laid down an auxiliary route for one-
quarter of the old line at a cost of Rs.4,00,000 and also subsequently
replaced the remaining length of the old line at a cost of Rs.15,00,000,
the cost of material and labour having gone up by 20%. Old materials
worth Rs.50,000 were used for renewal and the company realized
Rs.30,000 through sale of old materials.
Show the journal entries recording the above transactions and also the
working note for apportionment of the above expenditure between
capital and revenue.
Solution
Journal entries in the books of national teleservices ltd.
Dr. Cr.
Cash A/c Dr. 30,000
To replacement A/c 30,000
(Sales proceeds of old material)
Lines A/c Dr. 50,000

To Replacement A/c 50,000
(Old materials used)
Lines Dr. 10,00,000

Replacement A/c 9,00,000
Dr.
To cash A/c 19,00,000
(Cost allocated between capital and revenue)
Revenue A/c Dr. 8,20,000

To Replacement A/c 8,20,000
(Balance of Replacement A/c transferred to
246
Revenue A/c)
Working Note :
Apportionment of Expenditure between capital and revenue
Rs.
Cost of replacing 3/4th of the old line in original form 7,50,000
Add : Increase in costs of material and labour @ 20% 1,50,000
Current replacement cost 9,00,000
Less : Sale of old material Rs. 30, 000
Materials used Rs. 50,000 80,000
Charge to Revenue 8,20,000
Cost of replacement of old line 15,00,000
Cost of auxiliary route 4,00,000
Cost of old materials used 50,000
19,50,000
Less : Present cost of replacing the cost of old line 9,00,000
Amount to be capitalized 10,50,000
Illustration 6
An electric supply co. rebuilds its mains at the cost of Rs.19,90,000. This
exclusive value of Rs.13,800 material of old main used for new one. The
original mains were constructed at a cost of Rs. 9,90,000. the ratio of
material and labour then was 7:3. The increase in material prices is 12 ½
% and in wages rates 15%. Material worth Rs.25,200 from old works
was sold.
Show journal entries and prepare works account and replacement
account under double account system for the above and determine the
net cost of replacement.
Solution
Electric supply Co.

Journal entries
(Rs. in (Rs.in
Lakhs) Lakhs)
Works A/c (3)8,68,825

Dr.
247
Replacement A/c (1) Dr
11,21,175
To Bank A/c 19,90,000
(Being the amount paid for replacement of

asset allocated between capital and
revenue)
Works A/c Dr. 13,800
To replacement A/c 13,800
(Being the cost of material of old Main used

in new works)
Bank A/c Dr. 25,200
To Replacement 25,200
(Being the amount realized from the sale of

old works)
Revenue A/c Dr. (2)10,82,175
To Replacement A/c 10,82,175
(being the balance of replacement A/c

transferred to Revenue A/c)
Works Account
Rs. Rs.
To Balanced b/d 9,90,000 By Balance c/d 18,72,625
To Bank 8,68,825
To Replacement A/c 13,800
18,72,625 18,72,625
Replacement Account
Rs Rs
To Bank A/c 11,21,175 By Bank A/c 25,200
By Works A/c 13,800
By Revenue A/c 10,82,175
11,21,175 11,21,175
248
Working Notes :
(1) Calculation of Current replacement cost :

Material Labour Total
9,90,000
Original cost 70% 6,93,000 30% 2,97,000
1,31,175
Add : Increase 12 ½ % 86,625 15% 44,550
Current
11,21,175
Replacement cost 7,79,625 3,41,550
(2) Calculation of charge to revenue (or Net cost of Replacement)

Rs. Rs.
11,21,175
Current Replacement cost
13,800
Less : Re-use of Material
25,200 39,000
Sale of Material
10,82,175
Charge to Revenue
(3) Amount to be capitalized

Rs.
Cost of new works 19,90,000
Less : Estimated replacement cost 11,21,175
Amount to be capitalized 8,68,825
13.7 NEW FORMS
The new forms are prescribed in Annexures IV and V of the Indian

Electricity rules, 1956*. Annexure IV deals with technical and financial
particulars and Annexure V deals with forms of accounts. The electricity
companies are now required to prepare their accounts in the forms given
below. The accounts are to be prepared every year for the year ending
31st March and submitted to the State Governments. After going
through the new forms given below, an intelligent student would make
out that the capital account as well as revenue account are split into two
statements each and the forms are more detailed than before. The table
below gives a ready comparison of the old forms with the forms now
current.
New forms
Old Forms
(1) Statement of share and loan capital
1. Capital account
(2) Statement of capital expenditure
(3) Statement of operating revenues
2. Revenue account
(4) Statement of operating expenses
(5) Statement of net revenue and
3. Net revenue account
249
appropriation account
(6) General balance sheet.
4. General balance sheet
LET US SUM UP
Every electric supply company shall prepare its accounts to 31st March,
and to be drawn up in accordance with the requirements of the
companies Act 2013. The final accounts of electricity companies,
comprise revenue and net revenue accounts capital account and
general balance sheet. In order to avoid exploitation of consumers,
certain provisions, like, reasonable return and disposal of surplus, have
been made in the act. Under double account system a different
procedure in adopted when an asset was replaced by another. The old
asset account continues to be in the books at original cost.
CHECK YOUR PROGRESS

1. When an asset is replaced
a) the current cost of replacement is written off to revenue
b) he original cost of the asset is written off to revenue
c) the original cost reduced by the amount of depreciation is written
off to revenue
d) the lower of (a) or (b).
2. Original cost of an asset Rs.5,00,000. Present cost of replacement
Rs. 6,50,000. Amount spent on replacement Rs.7,60,000. The
amount chargeable to revenue will be :
a) Rs. 6,50,000 b)Rs.5,00,000
c)7,60,000 d)Rs.2,60,000
3. Interest on debentures is shown in:
a) Revenue account b) Capital account
c)Net revenue account d) Capital account
4. When an asset is replaced, any amount realized on sale of old
materials will be credited to
a) Replacement account b)Asset account

c)Revenue account d) Net revenue account
5. Cost of licence is shown in the
a) Capital account b)Revenue account
c)General balance sheet d) Net revenue account
250
6. Contingencies reserve is created:
a) to declare dividend during years when profits are inadequate
b) to meet abnormal expenses which are beyond the control of
management
c) strengthen generally the financial position of the company
d) either (b) or (c)
7. The essential feature of the double account system is:
a) for every debit there is a corresponding credit.
b) the presentation of capital receipts and capital expenditure in a
separate account.
c) the presentation of assets at original cost, the depreciation to
date being shown to the credit of depreciation reserve account.
d) all the above
8. Under double account system, depreciation is:
a) credited to the asset account

b) credited to depreciation reserve account
c) debited to revenue account
d) debited to Net-revenue account
GLOSSARY
Clear Profit : It is the difference between the amount

of income and expenditure and reduced
by the specific appropriation.
Surplus : Surplus is the excess of clear profit

over reasonable return, the surplus has
to be disposed as per the provision of
the act.
Tariffs and Dividend : This reserve in created out of profit in

Control reserve excess of reasonable return earned by
an electricity company.
Contingency Reserve : All electricity companies are required to

maintain this reserve to meet any loss
arising out of accident, strikes or to pay
any compensation for which there is no
other provision.
251
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Problems & Solutions in Electricity Company|Double Account
System|PART 3 Video|Explained in TamilBR - YouTube
2. Problem in Double Account System| Video 4| Electricity
Company|Corporate Accounting-II |TamilBR - YouTube
1.a) 2.a) 3.c) 4.a) 5.a) 6. d) 7. d) 8.b)
252
BLOCK 5
RECENT TRENDS IN ACCOUNTING
UNIT 14 : ACCOUNTING STANDARDS
UNIT 15 : INFLATION ACCOUNTING
UNIT 16 : HUMAN RESOURCES AND SOCIAL

ACCOUNTING
UNIT 17 : VALUED ADDED STATEMENT AND ECONOMIC
VALUE ADDED
UNIT 18 : ACCOUNTING IN COMPUTERISED
ENVIRONMENT
253
UNIT 14
ACCOUNTING STANDARDS
STRUCTURE
Overview
Learning Objectives
14.1 Introduction to Accounting Standards
14.1.1 Objectives of Accounting Standards

14.1.2 Benefits of Accounting Standards
14.2 Need for Global Standards
14.2.1 International Accounting Standards

14.3 Formulation of Accounting Standards in India
14.3.1 List of Accounting Standards in India
Let Us Sum Up
Check Your Progress
Glossary
Suggested Readings
OVERVIEW
Accounting is language of business. In order to understand the language
in the same way, there must be rules regarding its construction,
expression etc. Similarly accounting needs a set of rules, which are
called “Accounting Principles”. There are two subsets of accounting
principles. The first one refers to a set of basic assumptions which are
necessary conditions in the preparation of accounts. These principles
variously called accounting concepts and conventions. The second sub-
set are the principles that govern the detailed practices and procedures
in the preparations of financial statements. For example, on what basis
inventory is to be valued, how depreciation to be determined, mode of
valuing fixed assets etc. These principles are called accounting
standards ‘or’ “Generally Accepted Accounting Principles” (GAAP). It
should be noted that GAAP differ from country to country.
254
LEARNING OBJECTIVES
• illustrate the significance of issuance of accounting standard.
• explain the objectives and benefits of accounting standard.
• Discuss the need of global standards.
• learn the process of formulation of accounting standards by the
council of the institute of Chartered Accountants of India.
• familiarize with the list of applicable Accounting Standards in
India.
14.1 INTRODUCTION TO ACCOUNTING STANDARDS
To ensure transparency, consistency, comparability and reliability of
financial statements, it is essential to standardise the accounting
principles and policies. If the financial accounting process is not properly
regulated, there is possibility of financial statements being misleading
and providing a distorted picture of the business, rather than the true.
Accounting Standards provide framework and standard accounting
policies for treatment of transactions so that the financial statements of
different enterprises become comparable. Accounting standards are
written policy documents issued by the expert accounting body or by the
government or other regulatory body covering the aspects of
measurement, presentation and disclosure of accounting transactions
and events in the financial statements. In U.S. “Federal Accounting
Standard Board” is framing standards from time to time. The “Accounting
Standards Board”, set up on 1990 issues, ‘Financial Reporting
Standard’, in U.K. In India, the institute of Chartered Accountants
constitutes “Accounting Standard Board”. This board is independent in
the formulation of standards in India.
14.1.1 Objectives of Accounting Standard
The motive of Accounting Standards is centered around harmonisation
of accounting policies and practices followed by different business
entities and standardise the diverse accounting practices.
• Accounting Standard eliminate the non-comparability of financial
statements and thereby improving the reliability of financial
statements.
• Accounting Standard provide a set of standard accounting
policies, valuation norms and disclosure requirements.
255
14.1.2 Benefits of Accounting Standards
Benefits: Standards eliminate confusing variations in the accounting
treatments used to prepare financial statements.
• Standards may call for disclosure beyond that required by law.
• Standards facilitate comparison of financial statements of
companies situated in different parts of the world, and also
different companies situated in the same country.
14.2 NEED FOR GLOBAL STANDARDS
Each country has its own rules and regulation for financial reporting. The
enterprises which operate in different countries face a multitude of
accounting requirements prevailing in the countries. This problem is
lessened with convergence of accounting standards because it simplifies
the process of preparing the individual and group financial statements
and thereby reduces the cost of preparing the financial statements using
different set of accounting standard.
The harmonization of financial reporting around the world, through
United International Accounting Standards, will help the investors who
wish to invest outside their own country. Financial statements prepared
using a common set of Accounting Standards help investors better
understand investment opportunities as opposed to financial statements
prepared using a different set of national accounting standards. In short
the global standards benefits the national economy by increasing growth
of its international business.
14.2.1 International Accounting Standards
The International Accounting Standard Committee (IASC), responsible
for developing international accounting standards, was established in
June 1973. It is presently known as International Accounting Standard
Board (IASB). This Board comprises the professional accountancy
bodies of over 75 countries (including the Institute of Chartered
Accountants of India).
The members of IASB have undertaken the responsibility to support the
standards promulgated by IASC and to propagate those standards in
their respective countries. IASB publishes its standards in a series of
pronouncements, called International Financial Reporting Standard
(IFRS).
Every major nation is moving towards adopting the IFRS to some extent.
Large number of authorities requires public companies to use IFRS for
stock exchange listing purpose, and in addition banks, insurance
256
companies and stock exchange may use them for their statutorily
required reports.
Many lenders and regulatory and government bodies are looking to
IFRS to fulfil local financial reporting obligations relating to financing or
licensing.
14.3 FORMULATION OF ACCOUNTING STANDARDS IN INDIA
The Institute of Chartered Accountants of India (ICAI) being a premier
accounting body in the country took upon itself the leadership role by
constituting the Accounting Standards Board (ASB) in 1977. The ASB
has taken significant initiatives to ensure that the standard setting
process is fully consultative and transparent. The ASB considers
International Financial Reporting Standards while framing Indian
Accounting Standards, and try to integrate them, with the applicable
laws, customs, usage and business environment in the country.
The composition of ASB includes representatives of Industries (namely

ASSOCHAM, CII, FICCI) regulators, academicians, government
departments. Though accounting standard board is a body constituted
by the council of ICAI, the Board is independent in the formulation of
accounting standards and council of ICAI is not empowered to make any
modifications in the accounting standard formulated by ASB without
consulting with the ASB.
14.3.1 List of Accounting Standards in India
The ‘Accounting Standards’ issued by the Accounting Standards Board
establish standards which have to be complied by the business entities
so that the financial statements are prepared in accordance with
generally accepted accounting principles.
Following is the list of applicable Accounting Standards:

Sl. Number of the Accounting Title of the Accounting Standard
No. Standard (AS)
1. AS 1 Disclosure of Accounting Policies
2. AS 2 (Revised) Valuation of Inventories
3. AS 3 (Revised) Cash Flow Statements
4. AS 4 (Revised) Contingencies and Events
Occurring after the Balance Sheet
Date
5. AS 5 (Revised) Net Profit or Loss for the Period,
Prior Period Items and Changes in
Accounting Policies
6. AS 6 (withdrawn pursuant Depreciated Accounting
257
to issuance of AS 10 on
Property, Plant and
Equipment 2016)
7. AS 7 (Revised) Accounting for Construction
Contracts
8. AS 8 (withdrawn pursuant Accounting for Research and
to AS 26 becoming Development
mandatory)
9. AS 9 Revenue Recognition
10. AS 10 Property, Plant and Equipment
11. AS 11 (Revised) The Effects of Changes in Foreign
Exchange Rates
12. AS 12 Accounting for Government Grants
13. AS 13 Accounting for Investments
14. AS 14 Accounting for Amalgamations
15. AS 15 (Revised) Employee Benefits
16. AS 16 Borrowing Costs
17. AS 17 Segment Reporting
18. AS 18 Related Party Disclosures
19. AS 19 Leases
20. AS 20 Earnings Per Share
21. AS 21 Consolidated Financial Statements
22. AS 22 Accounting for Taxes on Income
23. AS 23 Accounting for Investments in
Associates in Consolidated
Financial Statements
24. AS 24 Discontinuing Operations
25. AS 25 Interim Financial Reporting
26. AS 26 Intangible Assets
27. AS 27 Financial Reporting of Interests in
Joint Ventures
28. AS 28 Impairment of Assets
29. AS 29 Provisions, Contingent Liabilities &
Contingent Assets
LET US SUM UP
Accounting is language of business. Hence it needs a set of rules, which

are called accounting principles. The principles, which are governing the
practices and procedures in the preparation of financial statements are
called as “Accounting Standard”. Each country has its own set of
258
professional body to frame such standards. These standards make the
financial statements, reliable, transparent and comparable.
To help the international trade, free flow of foreign capital, and to
investors willing to invest outside their own country, international
accounting standard, called international financial reporting standards,
has been issued by international accounting standard board. In India the
institute of chartered accountants of India takes the lead in framing
accounting standards of India by constituting the accounting standard
board. At present 29 accounting standards are issued by ASB and
followed by Indian companies.
CHECK YOUR PROGRESS
1. Global Standards facilitate

a) Cross border flow of money
b) Global listing in different houses
c) Comparability of financial statements
d) All the three.
2. Accounting Standards
a) Harmonize accounting policies
b) Eliminate non comparability
c) Improve the reliability of financial statements
d) All the three
3. It is essential to standardize the accounting principles and policies in
order to ensure
a) Transparency b) Consistency
c) Comparability d) All the three
4. How many accounting standards have been followed at present in
India?
a) 25 b) 29 c) 32 d) 28
5. IASB stands for
a) Indian Accounting Standards Board
b) Indian Accounting Standards bulletin
c) International Accounting standard bulletin
d) International accounting standards board
GLOSSARY
GAAP : Generally Accepted Accounting Principles
Accounting Standard : Set of rules to harmonize the accounting

policies and standardise the diverse
259
accounting practices.
IASC : International Accounting Standard

Committee, responsible for developing
international accounting standard.
IFRS : International Financial Reporting Standards
ASB : Accounting Standards Board constituted by

Institute of Chartered Accountants of India
(ICAI)
SUGGESTED READINGS
1. Maheswari, S.N. 1986, Introduction to Accounting, Vikas Publishing
House, New Delhi. (Chapter 10)
2. Patil, V.A and J.S. Korlahalli, 1986, Principles and Practice of
Accounting, R. Chand & Co., New Delhi (Chapter 20)
3. William Pickles. 1982. Accountancy, E.L.B.S. and Pitman, London.
(Chapter 5)
4. Gupta, R.L. and M. Radhaswamy, 1986. Advanced Accountancy,
Sultan, Chand & Sons, New Delhi. (Chapter 4,5).
5. Shukla, M.C. and T.S. Grewal, 1987, Advanced Accountancy, S.
Chand & Co., New Delhi, (Chapter 2)
WEB RESOURCES
1. Accounting Standard in Tamil | Chapter 1 - Unit 8 | CA

Foundation Accounts Class Series Video. - Bing video
2. Introduction of Accounting standards in Tamil - YouTube
3. Accounting Standards - Bing video
4. International Accounting Standard 23 | Borrowing Costs or IAS
23 | ACCA (SBR) | Part-1 - Bing video

1.(d) 2. (d) 3. (d) 4. (b) 5. (d)
260
UNIT 15
INFLATION ACCOUNTING
STRUCTURE
Overview
Learning Objectives
15.1 Introduction
15.2 Limitations of Conventional Financial Statements
15.3 Meaning of Inflation Accounting

15.4 Methods of Inflation Accounting
15.5 Current Purchasing Power Method
15.5.1 Conversion Factor
15.5.2 Mid Period Conversion
15.5.3 Monetary and Non-Monetary Items
15.5.4 Gain or loss on monetary items
15.5.5 Cost of Sales and Inventories
15.5.6 Determination of Profit
15.5.7 Criticism of Current Purchasing Power Method

15.6 Current Cost Accounting Method
15.6.1 Objectives of Current Cost Accounting
15.7 Adjustments and Provisions Required
15.7.1 Revaluation Adjustment
15.7.2 Depreciation Adjustment
15.7.3 Cost of Sales Adjustment (COSA)
15.7.4 Monetary Working Capital Adjustment (MWCA)
15.7.5 Gearing Adjustment

15.7.6 Evaluation of CCA System
15.8 Evaluation of C.C.A. system
15.9 Hybrid Method

15.10 India and Price Level Accounting
261
Let us Sum up
Check Your Progress
Glossary
Suggested Readings
OVERVIEW
The dictionary defines inflation as - a substantial rise in prices - rise in
general price levels - a fall in the value of money - a rise in the money
value of National Income greater than the rise in its real value. The
common idea is that there is a change in the relationship between
money and goods/services. Inflation is not a new phenomenon. But due
to close interaction between nations globally, inflation has assumed
great political and economic significance over the past two decades.
LEARNING OBJECTIVES
• explain the concepts of Price Level Accounting and Inflation
Accounting.
• appreciate the need for price level accounting.
• explain the different methods of price level accounting.
• identify appropriate accounting adjustments for presenting price
level adjusted accounts; and
• explain the meaning of certain key items.
15.1 INTRODUCTION
The basic objective of accounting is the preparation of financial

statements in a way that they give a true and fair view of the operating
results and the financial position of a business. In other words, the
income statement should disclose the true profit or loss made by the
business during a particular period, while the balance sheet must show a
true and fair view of the financial position of the business on a particular
date. Financial statements are prepared in monetary units, i.e., rupees,
in our country. They can serve very well the basic objective if the value
of such monetary units remains stable. This is possible only when there
is a stability in the price levels. However, it has been our experience that
over a period of time, the prices have not remained stable.
Financial statements which are prepared according to the conventional
or historical cost accounting system, therefore, do not reflect current
economic realities.
262
15.2 LIMITATIONS OF CONVENTIONAL FINANCIAL STATEMENTS
The income statement and the balance-sheet prepared according to

conventional or historical cost accounting system have been the subject
of criticism by accountants, investors, financial analysts, etc. on account
of the following reasons:
(1) Fail to disclose current worth of the enterprise. The financial

statements prepared under the conventional system are merely
statements of historical facts. They do not purport to show the true
current worth of the enterprise.
(2) Contains non-comparable items. For example, if a company
constructed a building for a sum of Rs.5,00,000 in 1985 and constructed
a similar building in 2003 at a cost of Rs.20,00,000 the total cost of
factory building will be shown in the balance sheet at the end of 2003 as
follows:
Factory Building (1985) Rs. 5,00,000
Factory Building (2003) Rs. 20,00,000
Rs. 25,00,000
(3) Creates problems at the time of replacement. Problems may arise
when the asset has to be replaced and larger funds are required on
account of inflationary conditions.
(4) Mixes holding and operating gains. In conventional accounting

gains on account of holding the inventories may be mixed up with the
operating gains. For example, a business purchased 100 units of a
product at Rs.6 per unit in 2000. It could sell only 50 of such units in that
year. In 2001, it purchases another 100 units at Rs.8 per unit and sells
all 150 units at Rs.10 per unit. In such a case the profit in 2001 as per
historical accounting will be as follows:
Sales (150 units x Rs.10) Rs. 1,500
Less: Cost of sales (50x6+10018) Rs. 1,100
Rs. 400
As a matter of fact out of the total profit of Rs.400, a sum of Rs.100 (i.e.
50x2) is only on account of holding the inventory. This is because if all
the units sold had been purchased during 2001, the profit would have
been only Rs.300 (i.e.,150 units x Rs.2). Thus, Rs. 100 is the holding
profit while Rs.300 is the operating profit. The historical accounting
system, as seen above, does not make this distinction.
263
15.3 MEANING OF INFLATION ACCOUNTING
"Inflation accounting is a system for accounting which purports to record
as a built-in mechanism all economic events in terms of current cost".
Thus, inflation accounting is a system of maintaining the accounts just
like historical accounting. The difference lies in the process of matching-
cost against revenue. In historical accounting cost represents historical
cost where in inflation accounting it represents the cost prevailing at the
reporting date or time.
The distinctive features of inflation accounting are as follows:
(i) The recording procedure is automatic.
(ii) It considers all elements of financial statements and is not
concerned only with fixed assets or closing stocks.
(iii) Realisation principles are not followed rigidly, particularly,
when recording long-term fixed assets at the current value.
15.4 METHODS OF INFLATION ACCOUNTING

The following are the generally accepted methods of accounting for price
level changes:
1) Current Purchasing Power Method or General Purchasing
Power Method (CPP or GPP Method)
2) Current Cost Accounting Method (CCA Method)
3) Hybrid Methods, i.e., a mixture of CPP and CCA methods.
15.5 CURRENT PURCHASING POWER METHOD
The method of current purchasing power was evolved by the Institute
Chartered Accountants in England and Wales by issue of the Provisional
Statement of Standard Accounting Practice No.7 (SSAP-7) entitled,
"Accounting for Changes in the Purchasing Power of Money”.
According to this method all items in the financial statements are to be

restated for changes in the general price level. For this purpose, any
approved price index is used to convert the various items of the balance
sheet and the profit loss account. For example, an asset purchased for
sum of Rs.200 in 1990 would be valued in 2000 according CPP Method
at the amount which would be needed to buy the asset as per change
the general price index in 2000 compared 1990. Presuming that general
price index was 150 in 1990 and 300 in 2000, the asset would be valued
at Rs.400 (i.e.200x300/150) as per CPP Method.
The preparation the financial statements according to CPP Method

requires the taking of the following steps:
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26.5.1 Conversion Factor
CPP Method requires restatement of historical figures as disclosed in
the financial statements at current purchasing prices. This is done by
multiplying historical figures by the conversion factor calculated as
Price Index at the date of conversion

Conversion factor =
Price Index at the date the item arose
The retail price index is considered to be the appropriate price index

under CPP Method.
Illustration: 1
A company purchased a machinery on 1.1.2015 for a sum of Rs.60,000.
The retail price index on that date stood at 150. You are required to
restate the value of the machinery according to CPP Method on 31st
December, 2020 when the price index stood at 200.
Solution:
Price Index at the date of conversion
Conversion factor =
Price Index at the date the item arose
200 4
= =
150 3
Value of machinery on 31st December 2020 after conversion.
= Existing value x Conversion factor
4
= 60,000 x = Rs.80,000
3
15.5.2 Mid Period Conversion
In case of transactions occurring throughout a period, it will be advisable
to convert them according to the average index of the period. Such
transactions generally include revenue items such as sales and
purchases of goods, payment of expenses, etc.
15.5.3 Monetary and Non-Monetary Items

While converting the figures under CPP Method, a distinction is to be
made between monetary items and non-monetary items.
Monetary items. These are Items whose amounts are fixed by contract
in terms of monetary units (rupees, dollars, pounds, etc.) regardless of
changes in the general price level. Examples of monetary items are
cash, debtors, creditors, loan capital, outstanding expenses, etc. Holders
of monetary assets lose general purchasing power during a period of
265
inflation, since their claims against the firm remain fixed irrespective of
any change in the general price level. The converse applies to those
having monetary liabilities.
Non-monetary items. These are the items that cannot be stated in fixed
monetary amounts. They include tangible items such as buildings,
machinery, inventories of materials of finished goods meant for sale.
15.5.4 Gain or loss on monetary items
It has already been stated above that change in the purchasing power of
money affects both monetary as well as non-monetary items. Of course,
in case of monetary items, the firm receives or pays amounts fixed as
per terms of the contract but it does gain or lose-in terms of real
purchasing power. Such gain or loss, termed as "general price level gain
or loss", should be taken into account under the CPP method, but it
should be shown as a separate item in the restated income statement to
arrive at the overall profit or loss. This is particularly important in case of
gain since the amount may not be available for distribution by way of
dividend on account of inadequate liquidity.
Illustration 2
Compute the net monetary result of Company Ltd. as at 31st December,
2001. The relevant data are given below:
Particulars 1.1.2001 31.12.2001
Rs. Rs.
Cash 5,000 10,000
Book debts 20,000 25,000
Creditors 15,000 20,000
Loan 15,000 20,000
Retail Price Index Numbers
January 1, 2001 200
December 31, 2001 300
Average for the year 240
Solution:
STATEMENT SHOWING THE NET MONETARY RESULT
ON ACCOUNT OF PRICE LEVEL CHANGES
Particulars Rs. Rs.

(i) Monetary liabilities as on 1.1.1991 should 52,500
have gone up with increase in price indices
266
(Rs.35,000 x 1.5)
(ii) Increase in monetary liabilities during 1991 6,250
which should have gone up with increase in
price indices (Rs.5,000 x 1.25)
Monetary liabilities on 31.12.2001 should 58,750
have stood at:
However, the liabilities on 31.12.2001 40,000
stood at
Gain on holding of monetary liabilities 18,750
(iii) Monetary assets as on 1.1.2001 should 37,500
have gone up with increase in price indices
(Rs.25,000 x 1.5)
(iv) Increase in monetary assets during 2001 12,500
should have gone up with increase in price
indices (Rs.2,5000 x 1.25)
Monetary asset on 31.12.2001 should have 50,000
stood at:
However, the monetary assets on 35,000
31.12.2001 stood at:
Loss on holding monetary assets (-) 15,000
Net gain on monetary items 3,750
Working Notes:
(i) Conversion factors:

(a) For items as on 1.1.1991 : 300 / 200 = 1.5
(b) For items arising during 1991 : 300 / 240 = 1.25
(ii) Increase in monetary assets and liabilities during 2001:
Particular as on 31.12.2001 Increase

1.1.2001 during 2001
(a) Monetary assets 25,000 35,000 10,000
(b) Monetary liabilities 35,000 40,000 5,000
15.5.5 Cost of Sales and Inventories

The cost of sales and value of inventories depend upon the cost flow
assumptions, i.e., first in, out (FIFO) or ‘last in, first out’ (LIFO).
Fist in, first out (FIFO) Method:
(i) Cost of Sales. It comprises entire opening stock and current
purchases less closing stock.
267
(ii) Closing Inventory: It comprises entirely current purchases.
However, in case total sales are even less than the opening
inventory, a part of the opening inventory may also become a
part of the closing inventory.
Last in First out (LIFO) Method:
(i) Cost of Sales. It comprises current purchase only. However,
if the current purchases are less than cost of sales, a part of
the opening inventory may also become a part of cost of
sales.
(ii) Closing Stock: It comprises purchases made in the previous
year or years.
The following indices are used under CPP Method for restating the
historical figures:
(a) For current purchase. Average index of the year.
(b) For opening stock: Index at the beginning of the year.
(c) For purchases of the previous year(s): Average indices for the
relevant year(s).
Illustration 3
From the following details ascertain (a) Cost of Sales and (b) Closing
Inventory as per CPP Method when the firm is following FIFO Method.
Historical Rs. Price Index
Opening stock on 1.1.2001 4,000 80
Purchases during 2001 20,000 125
Closing Stock (out of purchases 3,000 120

made in the last quarter)
Index No. on 31st December 2001 140
Solution
COST OF SALES AND CLOSING INVENTORY (FIFO)
Particulars Historical Conversation Converted
cost basis factor amount under
CPP
Opening inventory 4,000 140/80 7,000
Add: Purchase 20,000 140/125 22,400
24,000 29,400
Less: Closing inventory (b) 3,000 140/120 3,500
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Cost of goods sold (a) 21,000 25,900
Illustration 4
From the following data calculate (a) Cost of sales and (b) closing
inventory under CPP Method pursuing that the firm is following LIFO
Method for inventory valuation.
Rs.
Inventory as on 1.1.2001 8,000
Purchase during 2001 48,000
Inventory as on 31.12.2001 12,000
Price Index as on 1.1.2001 100
Price Index as on 31.12.2001 140
Average Price Index for 2001 125
Solution:
COST OF SALES AND CLOSING INVENTORY (LIFO)
Converted
Historical Conversation
Particulars amount under
cost basis factor
CPP
Inventory as on 1.1.2001 8,000 140/100 11,200
Add: Purchase 48,000 140/125 53,760
56,000 64,960
Less: Closing inventory (b)
From Opening inventory 8,000 140/100 11,200
From current purchases 4,000 140/125 4,480
Cost of goods sold (a) 44,000 49,280
15.5.6 Determination of Profit

The profit under CPP Method can be determined by conversion or
restatement of income statement method.
In case of this method, the income statement prepared on historical cost
basis is restated in CPP terms generally on the following basis:
(a) Sales and operating expenses are converted at the average rate
applicable for the year.
(b) Cost of sales is converted as per cost flow assumption (FIFO or
LIFO) as explained in the preceding pages.
269
(c) Fixed assets are converted on the basis of the indices prevailing
on the dates they were purchased. The same applies to
depreciation.
(d) Taxes and dividends paid are converted on the basis of Indices
that were prevalent on the dates they were paid.
(e) Gain or loss on account of monetary Items should be calculated
and stated separately in Restated Income Statement to arrive at
the overall figure of profit or loss.
15.5.7 Criticism of CPP Method
The Current Purchasing Power Method contained is SSAP-7 did not find
favour with a large number of accountants, economists, and
Government authorities on account of the following reasons:
(1) CPP Method is based on Index Nos., which are statistical
averages. The method cannot, therefore, be applied with
precision to individual firms.
(2) The selection of a suitable price index is a difficult task, since
there are various price Indices characterising different price
situations.
(3) The method deals with changes in the general price level and not
with changes in prices of individual items, except in so far as
individual prices happened to move in step with general price
index.
Illustration 5
The Balance Sheet of a company as on 1.1.2016 and Income Statement
for the year ending 31st December, 2016 are given below:
BALANCE SHEET
as on 1.1.2016
Share Capital 20,00,000 Fixed Assets 17,00,000

Creditors 7,50,000 Closing Stock 3,00,000
Debtors 2,50,000
Cash 5,00,000
27,50,000 27,50,000
270
Income Statement for the year ending 31st December, 2016
Rs. Rs.
Sales 50,00,000
Less: Cost of goods sold
Opening Stock 3,00,000
Add: Purchases 35,50,000
38,50,000
Less: Closing Stock 3,50,000 35,00,000
Gross Profit 15,00,000
Less: Operating Expenses 8,20,000
Depreciation on Fixed Assets 2,45,000 10,65,000
Net Profit 4,35,000
Debtors and creditors balances remained constant throughout the year.

The general price index was a follows:
On January 1, 2016 150

On December 31, 2016 180
Your are required to prepare the final accounts for the year 2016 after
adjusting for price level changes under current purchasing power
method.
Solution
PROFIT & LOSS STATEMENT AS PER CURRENT PURCHASING
POWER METHOD
for the year ended 31st December, 2016
Price Level
Historical Adjusted
Particulars Adjusted
cost basis Factor
Amount
Sales 50,00,000 180/160 56,25,000
Opening Stock 3,00,000 180/150 3,60,000
Add: Purchase 35,50,000 180/160 39,93,750
38,50,000 43,53,750
Less: Closing Stock 3,50,000 180/160 3,93,750
Cost of Goods Sold 35,00,000 39,60,000
Gross Profit (Sales-Cost of 15,00,000 16,65,000
Goods Sold)
271
Operating Expenses 8,20,000 180/160 9,22,500
Depreciation of Fixed Assets 2,45,000 180/150 2,94,000
Total Expenses 10,65,000 12,16,500
Net Profit 4,35,000 4,48,500
Less: Loss on monetary items 78,750
as calculated in a separate
statement shown below
Retained Earnings 3,69,750
Note: FIFO method has been followed for the cost of goods sold and
closing stock in the absence of information.
STATEMENT OF GAIN OR LOSS ON MONETARY ITEMS
Particulars Historical Adjusted Price Level Purchasing

Amount Factor Adjusted Power Gain
Amount or Loss
Monetary Assets on 1.1.2016:

Debtors 2,50,000 180/150 3,00,000
Cash 5,00,000 180/150 6,00,000
Increase in Cash (1) 6,30,000 180/160 7,08,750
Monetary Assets on 31.12.2016 13,80,000 16,80,750
Purchasing Power Loss (16,08,750- 2,28,750
13,80,000)
Monetary Liabilities on 1.1.2016 & 7,50,000 180/150 9,00,000
same
on 31.12.2016 Creditors
Purchasing Power Gain (9,00,000- 1,50,000
7,50,000)
Loss on Monetary Items 78,750
BALANCE SHEET
as on 31.12.2016
Rs. Rs.
Share Capital Fixed Assets

180 24,00,000 180 2,40,000
2,00,000 × 17,00,000 ×
150 150
Retained Earnings 3,69,750 Less: Depreciation 2,94,000
180
2,45,000 ×
150
Creditors 7,50,000 17,46,000
Closing Stock 3,93,750
180
3,50,000 ×
160
Debtors 2,50,000
272
Cash 11,30,000
(5,00,000+6,30,000)
35,19,750 35,19,750
Working Notes: Increase in cash

Sales proceeds 50,00,000
Less: Purchases 35,50,000
Operating Expenses 8,20,000 43,70,000
Increase in cash 6,30,000
15.6 CURRENT COST ACCOUNTING METHOD (CCA)
This method recognises the changes in the prices of individual assets
irrespective of the quantum and direction of change in the general price
level. Under this method assets are valued at current cost. The current
cost is the cost at which the assets can be replaced as on a date. Under
this method, profit is the excess of income at current values over
expenditure at current values.
15.6.1 Objectives of CCA
This method seeks to ensure that adequate provision/ adjustments are
made for the maintenance and replacement of the operating assets of
the company.
The operating assets of an enterprise comprise (a) the fixed assets, (b)
the stock-in-trade (of raw materials and finished goods), and (c) the net
monetary working capital (that is, the amount of its debtors less the
amount of its creditors). Whereas under the historical basis of
accounting these assets are shown at their depreciated original cost,
under the current cost accounting system these are shown at their
current cost or value which may be higher or lower than the former.
15.7 ADJUSTMENTS AND PROVISIONS REQUIRED

In order to achieve the objectives stated above, the following
adjustments/provisions are usually made.
15.7.1 Revaluation Adjustment

The fixed assets are shown at their value to the business' and not at
their depreciated original cost. The value to the business may be
decided in any one of the following ways.
(i) Net Current Replacement value. This refers to the money
now required to buy a new asset of the same type less the
amount of depreciation.
273
(ii) Net Realisable value. It is the estimated realisable value of
the asset on sale in the ordinary course of business less
estimated cost of disposal.
(iii) Economic / Recoverable value. This refers to the present
value of net income that will be earned by using the existing
asset during the rest of its life.
15.7.2 Depreciation Adjustment
The charge to the profit and loss account for depreciation should be
equal to the value of the fixed assets consumed during the period. When
the fixed assets are valued on the basis of their net current replacement
cost, the charge should be based on such cost. A suitable "depreciation
adjustment" is, therefore, required in historical cost profit to determine
the current cost profit.
Depreciation Adjustment may be ascertained according to any of the
following two bases:
(1) On the basis of total replacement cost of the asset. According
to this method "Depreciation Adjustment" may be computed as follows:
Required Depreciation Provision for the accounting
period as per CCA ………
Less: Depreciation charged for the accounting period
as per HCA ………

Depreciation Adjustment ………
(2) On the basis of Average Current Cost of Assets. The

depreciation adjustment in the above illustration has been made by
reference to the Current Cost of the asset on the balance sheet date.
However, strictly speaking, this should be done on the basis of the
average Current Cost of the asset during the year. Average current cost
may be ascertained as follows:
Current Cost of the asset in the Current Cost of the asset
beginning of the year + at the end of the year
-------------------------------------------------------------------------------------
2
Illustration 6
A new machine was purchased on 1.1.2013 at a cost of Rs.10,00,000
and its useful life was estimated to be 10 years. On 1.1.2018 a new
machine similar to this, cost Rs.18,00,000 and on 31.12.2018
274
Rs.20,00,000. Calculate the amount of depreciation for 2018 assuming
that there is no change in the estimated life of the asset.
Solution:
Current value of the asset as on 1.1.2018-Rs.18,00,000
Expired portion of the service
Potential-5/10th (5 years have expired out of 10 years of
useful life as on 1.1.2018)
Therefore Depreciation provision under
CCA-5/10 x 18,00,000 = 9,00,000
Current value of the asset as on 31.12.2018 - Rs.20,00,000
Expired portion of the service potential
as on 31.12.2018- 6/10th.
Therefore Depreciation Provision under
CCA 6/10 x 20,00,000 = 12,00,000
Amount of depreciation to be charged for 2018.
Average current cost of the asset during the year:
18,00,000+20,00,000
= -------------------------------- = Rs.19,00,000
2
Therefore, Depreciation will be 1/10th of Rs.19,00,000 Rs.1,90,000

This may be expressed by means of a formula
Opening current value of asset + Closing
Current years depreciation current value of asset
(under CCA) = ------------------------------------------------------
2 x Asset Life
(3) Backlog Depreciation. In the above example, the difference
between the depreciation on 31.12.2018 amounts to (Rs.12,00,000-
9,00,000)=Rs.3,00,000, whereas the amount chargeable to current year
is calculated at Rs.1,90,000. This gives rise to a backlog depreciation of
(Rs.3,00,000-1,90,000) Rs.1,10,000. Backlog depreciation arises
whenever a depreciating asset is revalued. Such revaluation makes the
earlier provision inadequate and necessitates the provision for backlog
depreciation. The backlog depreciation is debited to the 'Revaluation
275
Reserve' which arises from revaluation of asset every year and is set off
against the gain on revaluation of asset which is credited to Revaluation
Reserve.
15.7.3 Cost of Sales Adjustment (COSA)
CCA method is based on this important principle that current cost must
be matched against current revenue for determining the operating profit
or loss. The amount of sales is the current revenue and hence no
adjustment is required in its figure. However, items which enter into the
computation of cost of sales such as, raw materials consumed or
finished goods sold, have be taken at the present value at which these
would have to be replaced if consumed or sold. The difference in values
is termed as cost of sales adjustment, which is debited, before deriving
the operating profit, to Profit and Loss Account and credited to Current
Cost Accounting Reserve Account.
Illustration 7
From the following information calculate the Cost of Sales Adjustment
Particulars H.C.A. Index of

goods
Rs.
Stock as on 1.1.2018 4,000 180
Purchases during 2018 12,000 198
16,000 (Average)
Closing stock as on 31.12.2018 5,000 220
Historical Cost of Sales 11,000
Solution
COST OF SALES UNDER CCA METHOD
Opening stock as on 1.1.2018 (Note 1) Rs. 4,400
Add: Purchase during 2018 (Note 2) Rs. 12,000
Total average current cost of goods available for sale Rs. 16,400
Less: Closing Stock as on 31.12.1988 (Note 3) Rs. 4,500
Average current cost of sales Rs. 11,900
276
The historical cost of goods sold is Rs.11,000. Hence, Rs.900 is “cost of
sales adjustment” which will be debited to Profit and Loss Account, and
credited to Current Cost Accounting Reserve Account.
Notes:
1. Opening stock must have been sold during the year. Its average
current cost has, therefore, been ascertained as follows:
4,000 x 198 / 180 = Rs.4,400
2. Sales and purchases are presumed to have been made evenly
throughout the year since purchases are at average current cost,
no adjustment is required.
3. In order to determine the average current cost of goods sold,
average current cost of closing stock has to be deducted from
the average current cost of goods available for sale. The average
current cost of closing stock has been determined as follows:
5,000 × 198
= 𝑅𝑠. 4,500
220
15.7.4 Monetary Working Capital Adjustment (MWCA)
Due to increase in prices, additional monetary working capital is required
for efficient and profitable operation of the enterprise. The term monetary
working capital refers to the aggregate of accounts receivable and
prepayments less accounts payable and accruals. Current cost
accounting ensures, this through the medium of a “Monetary Working
Capital Adjustment”. The additional net monetary working capital
required purely on account of increase in the price levels (and not on
account of increase in scale of operations) is provided for by charging to
the Profit and Loss Account with such increase and crediting the Current
Accounting Reserve.
Illustration 8
The Balance Sheet of J.Ltd. disclosed the following inter alia:
Particulars Jan.1 2018 Dec.31,

Rs. 2018 Rs.
Trade Debtors 2,00,000 2,60,000
Advances to Suppliers 60,000 80,000
Trade Creditors 1,50,000 1,60,000
Index Number 100 120
277
Calculate the Monetary working capital adjustment
Solution
Particulars Jan.1 2018 Dec.31,

2018
Trade Debtors 2,00,000 2,60,000
Advances to Suppliers 60,000 80,000
2,60,000 3,40,000
Less: Trade Creditors 1,50,000 1,60,000
Net Monetary Working Capital 1,10,000 1,80,000
Capital as per historical accounting Average 70,000

value of closing MWC
110
1,80,000 × 1,65,000
120
Average value of opening MWC

110 1,21,000
1,10,000 ×
100
Volume increase 44,000
Monetary working capital adjustment 26,000

required
15.7.5 Gearing Adjustment

The purpose of gearing adjustment is to bring into account the
advantage of borrowing during period of rising prices. The advantage is
due to the fact that replacement cost of assets exceeds the borrowing
that have financed them. The excess (less interest payable on the
borrowings) in effect accrues to shareholders and is realized when
assets are used up or sold out in the ordinary course of the business.
The position would be the reverse during period of falling prices.
Since no account is taken of this profit or loss while arriving at the

operating profit under CCA as explained earlier, the profit attributable to
shareholders would be understated (or where prices fall, overstated) if
the whole of the additional depreciation, the COSA and the MWCA are
charged in the Profit and Loss Account. Hence, it requires, a “Gearing
Adjustment”, as prescribed by SSAP 16, so that current cost profit
attributable to shareholders can be calculated. The Gearing Adjustment
is made by multiplying the total of three adjustments mentioned above,
278
Depreciation Adjustment, COSA and MWCA by the proportion that net
borrowings bear to the total funds in use. The same can be expressed in
the form of a formula:
𝐵
Gearing Adjustment =
𝐵+𝑆
Where: B = Net Borrowings : S = equity funds.
It will be appropriate to use ‘average gearing ratio’ for gearing
adjustment. The average gearing ratio may be obtained by taking the
average of the gearing ratios in the beginning and at the end of the
accounting period.
Illustration 9
From the following information, calculate the amount of “Gearing

Adjustment” in case of a company which has a capital mix of 40% debt
and 60% equity.
Depreciation Adjustment Rs. 10,000
COSA Rs. 5,000
MWCA Rs. 5,000
Rs. 20,000
Solution
Since the amount of debt content is 40% of the total capital employed, a
sum of Rs.8,000 (i.e. 40% of Rs.20,000) is of “Gearing Adjustment”. This
amount will be debited to “current cost accounting reserve” and credited
to “profit and loss account”. In other words, only a sum of Rs.12,000
(i.e., shareholders’ share) will be charged to Profit and Loss Account and
credited to Current Cost Accounting Reserve on account of the three
adjustments referred to in the question.
Illustration 10
The following are the Balance Sheets and Profit and Loss Account of a
company prepared on the basis of historical cost accounting.
BALANCE SHEET
as on 1.1.2016
Rs. Rs.
Profit & Loss A/c 3,00,000 Inventory 4,00,000
279
Sundry Liabilities 5,00,000 Debtors 3,00,000
Cash 1,00,000
18,00,000 18,00,000
BALANCE SHEET
as on 31.12.2016
Rs. Rs.
Profit & Loss A/c 3,00,000 Less: 10%
Sundry Liabilities 5,00,000 Depreciation 1,00,000 9,00,000
Inventory 3,20,000
Debtors 4,00,000
Cash 1,80,000
18,00,000 18,00,000
PROFIT & LOSS ACCOUNT

for the year 2016
Rs. Rs.
To Inventory (1.1.16) 4,00,000 By Sales 30,00,000
To Purchases 23,20,000 By Inventory 3,20,000
To Depreciation 1,00,000 (31.12.16)
To Other Operating
Expenses 3,00,000
To Net Profit 2,00,000
33,20,000 33,20,000
Additional Information:
(i) The current replacement cost of the goods sold on the

dates sales were made amounting to Rs.23,60,000.
(ii) On 1.1.2016, the replacement cost of the fixed assets
was Rs.12,00,000.
(iii) The current replacement cost of the inventory on
31.12.2016 is Rs.3,50,000.
You are required to prepare Income Statement for the year ending 31st
December 2016 and Balance Sheet as on that date on the basis of
Current Cost Accounting.
280
Solution
INCOME STATEMENT
for the year ending 31st December 2016
Rs. Rs.
Sales 30,00,000
Less: Cost of goods sold at replacement cost 23,60,000
Less: Depreciation on replacement cost basis 10% 6,40,000
on
10
Fixed assets × 12,00,000 1,20,000
100
Other operating expenses 3,00,000

Other operating expenses 4,20,000
Operating profit 2,20,000
Less: Holding loss on cost of goods sold (1) 40,000
Realised profit 1,80,000
Add: Unrealised holding gain (2) 2,30,000
Total profit 4,10,000
BALANCE SHEET
as on 31.12.2016
Share capital 10,00,000 Fixed Assets 12,00,000
P & L A/c Balance on Less: 10%
1.1.16 3,00,000 Depreciation 1,20,000 10,80,000
Add: Realised profit Inventory
For the year 1,80,000 4,80,000 (Replacement
Unrealised Holding Cost) 3,50,000
Gain (i.e.Revaluation Debtors 4,00,000
Reserve) 2,30,000
Sundry Liabilities 3,00,000
20,10,000 20,10,000
Working Notes:
(1) Calculation of Holding Loss on Cost of Goods Sold:
Replacement cost of goods sold 23,60,000
Less: Historical cost of goods sold: Opening inventory 4,00,000
Add: Purchases 23,20,000
Less: Closing inventory 27,20,000
3,20,000 24,00,000
Holding loss on cost of goods sold 40,000
281
(2) Calculation of Unrealised Holding Gain:
Replacement cost of fixed assets 12,00,000
Add: Replacement cost of inventory on 31.12.2016 3,50,000
15,50,000
Less: Historical cost of fixed assets on 1.1.16 10,00,000
Historical cost of inventory on 31.12.2016 3,20,000 13,20,000
Unrealised holding gain 2,30,000
Note: Sales and operating expenses will be same in Current Cost

Accounting as these are in historical cost accounting because these are
always measured in terms of prices prevailing at the time of actual sales
or operating expenses; so, no adjustment has been made in these
items.
15.8 EVALUATION OF C.C.A. SYSTEM
CCA system, on the whole, has been found to be satisfactory by
accountants all over the world. The system will also work well if the price
fall. However, it has been argued that CCA system has following
limitations.
• It does not provide adequate for backlog depreciation.
• Fails to provide funds for replacement of new types of assets.
• Inadequate gearing adjustment.
• Ignores gains or losses on monetary items.
15.9 HYBRID METHOD
Recently some authorities have suggested another method which is
essentially a compromise formula between CPP method and CCA
method. According to this method the adjustments of fixed assets and
inventories are to be made with reference to specific indices in place of a
general index as is the case under CPP method. Besides this,
purchasing power gains and losses in respect of monetary items are
also considered which are ignored under CCA method.
Advocates of this method argue that by combing these two methods, the
advantages of both can be obtained.
15.10 INDIA AND PRICE LEVEL ACCOUNTING
The problem of price level changes and its impact on the financial
statements has assumed considerable importance in the last few
decades. As a matter of fact, the very need for method of accounting to
take cognizance of changing prices has been often questioned. The
choice of an appropriate method has been widely debated. Keeping in
view these facts, the Institute of Chartered Accountants of India issued
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in September 1982 a Guidance Note on Accounting for Changing Prices
in the hope that it will stimulate thought and encourage a wider use of
the method of accounting for price level changes.
In a recently conducted empirical study in India covering 80 companies it
was found that only 11% were supplying inflation adjusted information
while the remaining 89% were preparing financial statements based on
historical cost only. Among the companies which reported inflation
adjusted information, around 4/5th was found to be using CCA method.
The rest were using some sort of replacement cost variant giving
inflation adjusted information.
LET US SUM UP
The effect of inflation is that prices of assets and liabilities go up and

accounts prepared under historical accounting system fail to present the
true profit and the fair value of financial statement. There are two
methods of accounting price level changes. Under current purchasing
power method, the financial statements are restated by using an
appropriate multiplier (conversion factor). Under current cost accounting
method, assets are valued at Current Cost, viz., Replacement Cost. The
Profit or Loss is arrived at after necessary adjustments and provisions,
viz. depreciation adjustment, cost of sales adjustment, and monetary
working capital adjustment, have been made. But the main drawbacks of
current cost accounting system is, that it has not considered the gain or
loss in monetary assets. But in current purchasing power, this concept
has also been taken into account.
CHECK YOUR PROGRESS
1. Which one of the following pairs is not correctly matched
a) MWCA – CCA
b) Replacement Cost – HCA
c) Monetary Gain – CPP
d) Economic Value- Value Accounting
2. Which one of the following inventory valuations ensures as nearly
as possible the matching of current costs with current revenue
a) FIFO b) Standard Price c) LIFO d) HIFO
3. The main objective of CCA approach is to
a) Maintain operating capability of the enterprise
b) Maintain the purchasing power of shareholder’s fund
c) Ascertain General Purchasing power gain or loss
d) Measure all values at constant rupees
4. Operating gains refers to the difference between
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a) Replacement cost and historic cost of the asset
b) Sale price and historic cost of the asset
c) Sale price and replacement cost of the asset
d) Historic cost and economic value of the asset
5. Under CPP accounting assets are presented at
a) Economic value
b) Current replacement cost
c) Net realisble value
d) Historic costs adjusted for General Price level changes
GLOSSARY
Inflation Accounting : The accounting technique which
purports to record as a built-in
mechanism all economic events in
terms of current cost.
Monetary Items : These are the items whose amounts
are fixed by contract in terms of
monetary units regardless of changes in
the general price level.
Non-monetary items : These are items that cannot be stated
in fixed monetary amounts
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Inflation Accounting ill. 6 Gain or loss on Monetary Items in tamil/

healthy education - Bing video
2. Inflation Accounting:Meaning and methods in tamil - Bing video

1.b) 2.c) 3.a) 4.c) 5.d)
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UNIT 16
HUMAN RESOURCES AND SOCIAL
ACCOUNTING
STRUCTURE
Overview
Learning Objectives
16.1 Meaning and Definition of Human Resource Accounting
16.2 Objectives of Human Resource Accounting
16.3 Assumption underlying Human Resource Accounting

16.4 Methods of valuation of Human Assets
16.5 Human Resource Cost Accounting
16.5.1 Historical Cost Approach
16.5.2 Replacement Cost Approach
16.5.3 Opportunity Cost (or) Market value approach
16.5.4 Standard Cost Approach
16.6 Human Resources Value Accounting
16.6.1 Lev and Schwartz: Present Value of Future Earnings
Model
16.6.2 Flamholtz stochastic Rewards Valuation Method
16.6.3 Prof.S.K.Chakraborty’s Model
16.6.4 Hermanson’s Unpurchased Goodwill Model

16.6.5 Hermanson’s Adjusted Discount Future Wages Model
16.6.6 Economic Value Method
16.7 Benefits of Human Resource Accounting

16.8 Problems and limitation of Human Resource Accounting
16.9 Human Resource Accounting in India
16.10 Meaning of Social Accounting

16.11 Measurement of Social Cost Benefit
16.12 Proforma of Social Accounting Statement
16.13 Corporate Social Responsibility
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Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
Up to the early decades of this century industrial and business
operations were relatively small and simple. People in organsations
were viewed as just a means of providing labour. However, with the
growth of larger markets for sophisticated products and services with
last five to six decades, the role of people as mere labourers diminished.
People’s aspirations and needs were not limited to just earning some
wages but extended to job satisfaction, ego, position, power, etc. Thus,
the people were considered as Human Resources of long-term.
So far, the main emphasis for evaluation of a business unit was on
commercial aspects (i.e. profitability) the social aspect has so far been
ignored. Is maximization of profit the sole objective of a business unit?
Many rules relating to social responsibilities of the business have been
framed by the government and as a result people have become
conscious of their rights.
LEARNING OBJECTIVES
• appreciate the need for human resource accounting
• appraise the different approaches for valuation of human
resources
• discuss the concept of social accounting
• prepare social income statement and social balance sheet.
16.1 MEANING AND DEFINITION OF HUMAN RESOURCE
ACCOUNTING
Human Resource Accounting is an attempt to identify and report

investment made in the human resources of an organization that are not
presently accounted for under conventional accounting practice.
Basically, it is an information system that tells the management what
changes overtime are occurring to the human resources of the business,
and of the cost and value of the human factor to the organization.
In simple words, "Human resources accounting is the art of valuing,

recording and presenting the worth of human resources in the books of
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accounts of an organization. Accordingly, human resources accounting
is an information system. It involves measuring the costs incurred by
business to recruit, select, train and develop personnel, evaluate their
economic value, and report to management the changes occurring in
this asset so that management may make use of this information for
planning, budgeting and control of human resources.
In the light of the above, three important aspects of human resources
accounting are
a. Valuation of Human Resources
b. Recording the valuation in the books of accounts
c. Disclosure of the information in the financial statement of the
business
The American Accounting Society Committee on human resources
accounting defines it as follows:
“Human resource accounting is the process of identifying and

measuring data about human resources and communicating this
information to interested parties"
Mr. Woodruff Jr. Vice President of R.G.Barry Corporation defines it as
follows:
"Human resources accounting is an attempt to identity and report
investments made in human resources of an organization that are
presently not accounted for in conventional accounting practice.
Basically, it is an information system that tells the management what
changes over time are occurring to the human resources of the
business".
16.2 OBJECTIVE OF HUMAN RESOURCE ACCOUNTING
Human Resource Accounting is basically adopted to treat human

resources as assets, to generate human data about human resources,
to assign value to human resources and to present human assets in the
balance sheet. The following are the main objectives of a Human
Resource Accounting system:
1. To furnish cost value information for making management
decision about acquiring, allocating, developing and maintaining
human resources in order to attain cost effective organization
objectives.
2. To allow management personnel to monitor effectively the use of
human resources.
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3. To provide a determination of asset control i.e, whether assets
are conserved, depleted or appreciated.
4. To aid in the development of management principle by
classifying the financial consequences of various practices.
5. To recognize the natural of all resources used or cultivated by a
firm and improvement of the management of human resources
so that the quality and quantity of goods and services are
increased.
6. To facilitate the effective and efficient management of human
resources.
16.3 ASSUMPTION UNDERLYING HUMAN RESOURCE
ACCOUNTING
This exercise requires some basic assumptions
1. People are valuable organizational sources capable of providing
present and future services to the organization and such future
services have economic value to the organization and can be
measured.
2. It is not the owning of such people but their service potential that
makes them organizational resources, providing for, of course,
necessary allowance for the expected turnover as they are not
owned by the enterprise.
3. Their value depends on how they are utilized by the organization
as the value can be enhanced, depleted or conserved by various
management actions like training, technological obsolescence
etc.
4. The information relating to the Human Resources would facilitate
various management decisions on acquisition, compensation,
training, development etc.
16.4 METHODS OF VALUATION OF HUMAN ASSETS
There are two approaches to valuation of human asset. One approach is

based on cost. The cost may be historical cost, replacement cost, or
opportunity cost. The second approach is to measure the economic
value of the resources based on capitalization of earnings. i.e., the
present value of future earnings. Thus, there an two major aspects of
Human Resource Accounting:
a) Human Resource Cost Accounting and

b) Human Resource Value Accounting
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16.5 HUMAN RESOURCE COST ACCOUNTING
Human Resource Cost Accounting is the measurement and reporting of

the costs incurred to acquire, develop and replace people as
organizational resources. It deals with two related types of costs
i) costs associated with the functions of the personnel management
process in acquiring and developing human resources; termed as
“Personal Cost Accounting”
ii) costs of people as human resources, termed as "human asset
accounting. The second category refers to accounting for the
costs of people as human assets rather than for the functions of
personnel management per se.
16.5.1 Historical Cost Approach

The actual cost incurred on recruiting, selecting, training and developing
the human resources of the organization are capitalized and written off
over the expected useful life of the human resources. That is the cost of
acquisition viz., recruitment, selection, placement together with
development costs of personal are capitalized and written off over their
effective serviceable life. Any employee leaves the organization the
associated costs are written off to Profits and Loss Account as an
expense.
Merits
1. Easy to work and simple to understand
2. It follows the concept of matching cost with revenue
Even though this method has the above merits it suffers from the
following limitations
(i) It takes into account a part of the employee’s acquisition cost
and thus ignores the aggregate value of their potential services.
(ii) It is difficult to estimate the number of years over which the
capitalized Expenditure is to be amortized
(iii) It is difficult to determine the rate of amortization. Should it be

increasing, constant or a decreasing one?
(iv) The economic value of human resources increases over time
the people gain experience. But in this approach, the capital cost
decreases every you’re through amortization.
289
16.5.2 Replacement Cost Approach
This approach first suggested by Rensis Likert, was developed by Eric G
Flamholtz on the basis of concept of replacement cost. Human
resources of an organization are to be valued on the assumption that
new similar organization has to be created from scratch and what would
be the cost to the firm to rebuild the human organization back to its
present effectiveness. It takes into consideration, all costs involved in
recruiting, hiring, training and developing the replacement to the present
level of proficiency and familiarity with the organization.
This approach is more realistic as it incorporates the current value of
company's human resources in its financial statements prepared at the
end of the year. It is more representative and logical. But it suffers from
the following limitations:
(i) This method is at variance with the conventional accounting
practice of valuing assets at historical costs.
(ii) There may be no similar replacement for a certain existing
asset. It is really difficult to find identical replacement of the existing
human resource in actual practice.
(iii) The determination of a replacement value is affected by the
subjective considerations to a marked extent and, therefore, the value is
likely to differ from man to man.
16.5.3 Opportunity cost approach (or) Market Value approach
This method of measuring the value of human resources of an
organization is based on the economist's concept of opportunity cost as
"the most profitable alternative use, that is foregone by putting it to its
present use". Hekimian and Jones make use of the concept of
opportunity cost, in valuing the human resources. They are of the view
that there is no opportunity cost for those employees that are not scarce
and also those at the top will not be available for auction. As such only
scarce people should comprise the value of human resources. The
employee is to be termed as scarce only when the employment in one
division of an individual or group denies this kind of talent to another
division. Thus, opportunity cost of an employee in one department is
calculated on the basis of the other-by-other departments for those
employees.
This approach has specifically excluded from its purview the employees
who are not scarce or are not being bid by the other departments. This is
likely to result in lowering the moral and productivity of the employees
who are not covered by the competitive process. Further, a person may
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be a valuable person in his department but may have a lower price in the
bid by the other department. Thus, the valuation based on the
competitive bid price may be misleading and inaccurate.
16.5.4 Standard Cost Approach.
This approach envisages establishment of a standard cost per grade of
employee updated every year. Replacement costs can be used to
develop standard costs of recruitment, training and developing
individuals. Such standards can be used to compare results with those
planned, variances produced should be analyzed and would form a
useful basis for control. But under this approach determination of the
standard cost for each grade of employee is a ticklish process.
16.6 HUMAN RESOURCES VALUE ACCOUNTING

Under this approach, the value of human resources can be found out in
two ways.
• By discounting the future salaries and other capital costs (costs
of recruiting and training) by a certain rate of discount.
• By discounting the future earnings of the organization at a
certain date by a suitable rate and allocating a part of the
present value of earnings to human resources. In consonance
with the above two premises, a number of valuation models have
been developed.
16.6.1 Lev and Schwartz Present value of future earning model
According to Lev and Schwartz, the value of human capital represented
by a person of age “r” is the present value of his remaining future
earnings from his employment. The following formula is given by them
for calculating the value of an individuals
T
I(t)
Vr = 
t =r (1 + R)t =r
Where Vr = the value of an individual r years old
I(t) = the individual’s annual earnings up to the retirement
T = retirement age
R = a discount rate
Lev and Schwartz are of the opinion that the determination of the total
value of firm’s labour force is a straightforward extension of the
measurement procedure of an individual value to the organization. The
model identifies an individual’s expected economic value to the
291
organization to his future earnings for his remaining active service life.
His future expected income stream is discounted by an appropriate rate
to arrive at the present value of his service. The value of total human
resources of an organization is found out by aggregating the present
value of all employees.
The model suffers from the following deficiencies:
a) Earning does not represent true worth
b) A person's value to an organization is not determined entirely by the
person's inherent qualities, traits and skills but also by the organizational
role in which the individual is placed.
c) The model also does not take into account the possibility and
probability of an individual leaving the organization for reasons other
than death or retirement
d) The assumption of the model that people will not make role changes
during their career with the organization also is unrealistic.
e) Earnings (salary) is an expense. How can the capitalized value of
expenses to be incurred in future be an asset? It is the value of the
benefit expected to accrue that should be capitalized and not the amount
to be spent for the use of the asset.
The neglect of these variables reduces the usefulness of the model
considerably. Yet it considers the economic value of the human beings.
16.6.2 Flamboltz Stochastic Rewards Valuation Mode
According to this model, the ultimate measure of an individual’s value to
organization is his expected realizable value. The expected realisable
value of an individual is the present worth of the futures services
expected to be provided during the period he is expected to remain in as
organization. This is based upon the notion that human beings, like all
other assets, are capable of providing future services that have
economic value.
Flamholtz Model:
m  R i − P(R i )
E(Rv) = nt =1  
i = 1 (1 + r)
i
E(Rv) = A person’s expected realizable value

Ri = value R to be derived by the organization for each position i
P(Ri) = Probability that an individual would occupy position i
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t = time of retirement
m = state of exit
r = discount rate
The model suggests a five-step approach for assessing the value of an
individual to the organization.
First of all forecast the period a person will remain in the organization,
i.e., his expected service life.
Second, identify the service states, i.e., the roles he might occupy
Third, estimate the value derived by the organization when a person
occupies a particular position for a specified time period.
Fourth, estimate the probability of occupying each possible mutually
exclusive state at specified future times.
Finally, discount (at a specified predetermined rate) the expected service
rewards to their present value.
The model is an improvement over Lev and Schwartz model as it (1)
takes into account the factors relating to the possibility and probability of
employee’s career movement and (2) of their quitting the organization
for reasons other than retirement and death. But according to Jaggi and
Law, the model falls short of a practical value in as much as that
probabilities will have to be determined for each individual occupying
various service states for 'n' period on individual basis and would be
tremendously expensive and time consuming and will involve large
variance reducing is usefulness.
16.6.3. Prof. S. K. Chakraborty's model (Aggregate Payment

Approach)
In his model, he has valued the human resources in aggregate and not
on Individual basis. However, managerial and non-managerial
manpower can be evaluated separately. The value of human resource
on a group basis can be found out by multiplying the average salary of
the group with the average tenure of employment of the employees in
that group and shown as Investment in the Position Statement. The
average annual salary payment for next few years could be found out by
salary grade structure and promotion schemes of the organization.
He has further suggested that recruitment, hiring, selection,
development and training cost of each employee be recorded separately
and could be treated as “deferred revenue expenditure” to be written off
over the expected average stay of the employee in the organization. If
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there is a permanent exit on account of death, retrenchment etc., then
the balance on the deferred revenue account for that year attributable to
that person should be written off against the income in the year of exit
itself.
16.6.4 Hermanson's Unpurchased Goodwill Model
This is the earliest model developed in 1964. Hermanson was the first to
suggest that human resources will come under the category of
“attritional assets” although an organization does not legally own them.
Hermanson has developed two valuation methods both of which are
based on economic concept value.
Under the 'unpurchased goodwill method' Hermanson has suggested
arriving at the value of human resources by capitalizing the profits in
excess of normal earning. Normal earnings are based on the normal rate
of return to the economy as a whole. The computation would be as
shown below:
Rs.
Average value of owned assets 3,00,000
Actual net profit (after) @ 15% 45,000
Net income at normal rate (say 12%) 36,000
Excess earnings over normal rate 9,000
Value of human assets by capitalizing the excess earning

Rs.9,000 * 100
= Rs.75,000
12
This method suffers from following limitations:

(1) It is based on historic cost and therefore of little value for decision
making.
(2) It is not right to assume that the human resources are the only
“unowned assets” and that the excess profits are entirely attributable to
human resources.
(3) This method assumes zero value to human resources when the
earnings are normal.
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16.6.5 Hermanson's Adjusted Discount Future Wages Model
This is basically similar to the Lev and Schwartz model in discounting
the future compensation to determine the value of an individual.
However, the value so arrived is adjusted by using an efficiency ratio.
The efficiency ratio is found by dividing the actual average earnings of
the firm by the normal earnings of all the firms. The ratio of 1 indicates
that the firm's average rate of return is equal to the average rate of
return for the economy. If the ratio is more than 1, higher than normal
earnings are indicated. Conversely when the ration is less than 1, the
firm's earnings are less than the normal earnings of all the firms.
16.6.6 Economic Value Method
The economist's concept of the value of an asset is equal to the present

worth of its estimated future economic benefits. This approach has a
strong theoretical appeal. But this method involves the following steps:
a) Estimation of the future benefits, and

b) Ascertaining the present value of such benefits by using an
appropriate interest (discount) rate.
It is very difficult to estimate the flow of future benefits unless the
organization has a single employee. In other cases where there is large
number of employees, it is difficult to identify the benefits flowing from a
particular employee. It is equally difficult to establish the discount factor
although cost of capital suffices for practical purposes. In view of the
measurement problems report is made to use substitute measures such
as replacement costs, opportunity costs, expected realizable value etc.
16.7 BENEFITS OF HUMAN ESOURCE ACCOUNTING
The concept of human resource accounting covers the people who
constitute valuable resource of an enterprise and information on the
investment and value of such resources is useful for internal and
external decision-making. Such accounting is of permanent importance
to the nation and also to individual organizations. The following are the
main benefits of Human Resource Accounting.
1. Helpful in Proper interpretation of Return on Capital Employed.
The human resource accounting will disclose the value of human
resources. This will help in proper interpretation of return on
capital employed. Such information will give long-term
perspective of the business performance which could be more
reliable than the return on capital employed based on net profit
only.
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2. Improves managerial decision-making. The maintenance of
detailed records relating to internal human resource (i.e.
employees), will improve managerial decision-making specially in
situations like direct recruitment versus promotion, transfer
versus retention, retrenchment or relieving versus retention utility
of cost reduction programme in view of its possible impact on
human relations and impact of budgetary control on human
relations and organizational behavior and decision or relocating
plants, closing down existing units, developing overseas
subsidiaries etc. Thus, the use of HRA will definitely improve the
quality of management.
3. Serves Social Purpose. It will serve social purpose by
identification of human resource as a valuable asset which will
help in prevention of misuse and under use due to thoughtless or
rather reckless transfers, demotions, layoffs and day to day
maltreatment by supervisors and other superiors in the
administrative hierarchy; efficient allocation of resources in the
economy; effecting economy and efficiency in the use of human
resources and proper understanding of the evil effects of
avoidable labour unrest/disputes on the quality of the internal
human resources.
4. Increase Productivity. It will have the way for increasing
productivity of the human resources because, the fact that a
monetary value attached to human resources, and that human
talent, devotion and skill are considered as valuable assets and
allotted a place in the financial statements of the organization,
would boost the morale, loyalty and initiative of the employees
creating in their mind a sense of belonging towards the
organization and would act as a great incentive, giving rise to
increased productivity.
5. Invaluable contribution to humanity. HRA will be an invaluable
contribution for accounting to humanity and it will lead to improve
human efficiency while preserving human dignity and honour. For
this, a basic change in individual behavior, attitude and thinking
is required. HRA will help realizing the value of human resources
and, thus, will influence the individual behavior, attitude and
thinking in the desired direction.
6. Essential where the human element is the prime factor. HRA
absolutely essential in such organizations where human element
is the prime factor. e.g. professional accounting firm, a drama
company, a solicitor and attorney firm, an educational Institution
etc.
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7. Helps in Investment decision. The value of a firm's human
resources is helpful in potential investor and other users in
making long term Investment decisions.
8. Completes MIS Human resource data would create a more
complete management information system as it can provide
information of vital importance for both short-term and long-term
decision-making as well as performance management. It will
provide adequate basis for decision on allocation of resources
e.g, budgeting, capital expenditure decisions and better
measurement of resources of an organization. Performance
measurement helps in assessing the strengths and shortcomings
of an organization and helps in making better promotion policies.
9. For successful operation of an organization. The success of an
organization very much depends on the build-up of quality work
force at all levels. The success stories of BHEL. ITC, Hindustan
Lever, Larsen & Toubro and several other enterprises are largely
due to the emphasis on human resource development. If this vital
asset is not shown in the balance sheet, to that extent the public
and investors are handicapped
16.8 PROBLEMS AND LIMITATIONS OF HUMAN RESOURCE
ACCOUNTING
No doubt Human Resource Accounting can provide valuable information
both for management and outsiders, yet its development and application
in different industries and organizations has not been very encouraging.
This accounting concept is not popular like social accounting because it
may not result in providing immediate and tangible benefits and on
account of the fact of lack of consensus among accountants and other
concerned about the basis of measurement of the value of human
resources The reluctance on the part of the organization to introduce the
Human Resources accounting system can be attributed to the following:
1. There are no specific and clear-cut guidelines for finding cost
and "value" of human resources of an organization. The existing
valuation system suffers from many drawbacks.
2. The life of human resources is uncertain and therefore, valuing
them under uncertainty seems unrealistic.
3. There is a possibility that Human Resource Accounting may

lead to dehumanising and manipulations in employees. For example, a
person having a low value may feel discouraged and thus, in itself, may
affect his competency in work
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4. The much-needed empirical evidence is yet to be found to
support the hypothesis that HRA, as a managerial tool, facilitates better
and effective management of human resources.
5. Human resources, unlike physical assets, are not capable of
being owned, retained and utilized at the pleasure of the organization.
Hence, treating them as "asset' in the strict sense of the term could not
be appropriate.
6. In what form and manner, should their value be included in the
financial statements? Regarding this there is no consensus in the
accounting profession.
7. If a valuation has to be placed on human resources how
should it be amortized? Should the rate of amortization be decreasing,
constant or increasing? Should it be the same or different for different
categories of personnel?
16.9 HUMAN RESOURCE ACCOUNTING IN INDIA

Under Sec.217 (2A) of the companies Act, 1956, the report of the
directors should include a statement showing the name of every
employee of company who is employed throughout the financial year
was in receipt of remuneration for that year which, in the aggregate, was
not less than such sum as may be prescribed. With effect from 12-3-99
the sum specified as per Companies (Particulars of Employee) Rules,
1975 is Rs. 6 Lakhs. Except for this requirement, Companies Act does
not call for any disclosure regarding the human resources of an
enterprise.
However, Companies like BHEL, ONGG, HMT, SAIL, MMTC, CCI and
SPIC have been giving information (though not continuously) about the
human resources on their own, in their published accounts. The
following are the main. features of HRA in the Indian scenario:
(1) Mostly companies have followed the model developed by Lev
and Schwartz for the purpose of valuing human resources.
(2) The discount rate applied varies from organization to another.
While MMTC applies 12% rate, SAIL. has chosen 14% to arrive at the
present value. In the case of ONGC the earnings are discounted at
12.25% being the rate at which Government of India is advancing loans
to ONGC. Different discount rate (other things remaining equal) will give
different values.
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(3) HRA has been given only on supplementary basis and not
has be Integrated in accounts. So the figure does not appear in the
(4) Every organization spends considerable amount in recruiting
and training personnel. All this expenditure is charged to income
statement and has not been capitalized. This statement is in strong
contrast to the acquisition of the assets like plant which are capitalized
(5) The reports also give additional Information such as the ratio
of human to non-human resources, ratio of turnover/human resources
and employee value added per of human capital.
16.10 MEANING OF SOCIAL ACCOUNTING
The term social accounting is of recent origin and many other terms like,
social audit”, socio-economic accounting, social cost benefits analysis,
report of corporate social information system, social accounting, social
responsibility accounting' etc are often interchangeably used for this.
Nowadays it is being realised that commercial evaluation of business
unit is not sufficient to justify commitment of funds to a business unit.
Rather evaluation will be complete only if it takes into consideration
social cost and benefits associated with them.
In order to gain understanding of the term social accounting, various
point of view given by some eminent accounting authorities are
reproduced below:
Ralph Eates defines the term as "The measurement and reporting,
Internal and external, of information concerning the impact of an entity
and its activities on society.
Elliot uses the term social responsibility accounting which, according to
him, “is a systematic assessment of and reporting on those parts of a
company's activities that have a social impact. Social responsibility
accounting, therefore, describes the impact of corporation decisions on
environment pollution the consumption of non-renewable resources, and
ecological factors, on the rights of individuals and groups on the
maintenance of public services, on public safety; on health and
education social concerns”.
16.11 MEASUREMENT OF SOCIAL COST BENEFIT
It is difficult to measure in precise monetary terms the social cost and
benefit of a particular project, only a broad judgment can be made about
the acceptability or rejection of a project on social grounds by making an
analysis of different social aspects associated with the project. Following
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methods/criteria can be used for the measurement of social cost benefit
of a particular project.
1. Capital Output Ratio. This method of measurement is important
in case of developing countries value there is shortage of capital
resources. As per this method, a project giving a higher output
per unit of capital employed is to be given preference over a
project giving a lower ratio of output to capital.
2. Value Added Method. This method is better than capital output
ratio method because it takes into consideration made by the
business to the nation's economy. According to this method
higher value added is preferred over a project having lower value
added.
3. Employment Potential. This criterion of measurement of social
cost benefit is important in a country like India which has acute
problem of unemployment. Society stands benefited when the
project provides more employment opportunities to its members.
A project having higher employment to be preferred over a
project having a lower employment potential.
4. Saving in Foreign Exchange. This is an important social
criterion for accepting or rejecting a project. According to this
criterion, a project having higher potentiality in terms of foreign
exchange benefits will get priority over a project having lower
foreign exchange benefits.
5. Social Cost Benefit Ratio. According to this method, a project
having a lower cost benefit ratio is preferred over a project
having a higher cost benefit ratio. In other words, the lower the
social cost better it is. Social benefits for calculating this ratio
include all economic and non-economic benefits which the
society is likely to receive on account of the project. Similarly,
social costs include all costs which the society is likely to pay in
monetary and non-monetary terms for the project.
16.12 PROFORMA OF SOCIAL ACCOUNTING STATEMENT
In India, there is no legal obligation on companies to provide information

on social costs and benefits in their annual statements, but some
progressive companies like Cement Corporation of India, Bharat Heavy
Electricals Ltd., Minerals and Metals Trading Corporation of India and
the Tata Iron and Steel Company Ltd are giving by means of
supplementary information, the details of the social costs and social
benefits as a result of their operations. We give below a proforma of
social accounting generally adapted by companies.
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Social Accounts
SOCIAL INCOME STATEMENT
(Rs. in lakhs)
Current Previous
year year
I.Social Benefits and costs of staff
A.Social Benefits to Staff :
1. Medical and hospital facilities
2. Educational facilities
3. Canteen facilities
4. Recreation, entertainment and cultural activities
5. Housing and township facilities
6. Water supply, concessional electricity and transport
7. Training and career development
8. Provident fund, gratuity, bonus, insurance benefits
9. Holiday, leave encashment and leave-travel benefits
10. Other benefits
Total Benefits to staff
B. Social Costs to Staff :
1. Lay off and involuntary termination
2. Extra hours put in by officers voluntarily
Total Cost to Staff
Net Social Income to Staff – I (A-B)
II. SOCIAL BENEFITS AND COSTS TO COMMUNITY
A.Social Benefits to Community:
1. Local taxes paid to Panchayat/Municipality
2. Environmental improvements
3. Generation of job potential
4. Generation of Business
Total Social Benefits to Community
B.Social Costs to Community:
Increase in cost of living in the vicinity on account of

the cement plants or a thermal power station
Net Social Income to Community – II (A-B)
III. SOCIAL BENEFITS AND COSTS TO GENERAL PUBLIC
A.Social Benefits to General Public:
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1. Taxes, duties, etc. paid to the State Governments
2. Taxes, duties, etc. paid to the Central Government
Total Benefits to General Public
B. Social Costs to General Public:
1. State services consumed – Electricity service
2. Central services consumed – Telephone, Telegrams

postal services and banking
Total social costs to general public
Net Social Benefits to General Public – III (A-B)
NET SOCIAL INCOME TO STAFF, COMMUNITY

AND GENERAL PUBLIC (I + II + III)
SOCIAL BALANCE SHEET

(Rs. in lakhs) (Rs. in lakhs)
Current Previous Current Previous

year year year year
1. Organisation Equity I. Social Capital

Investment
2. Social Equity 1. Township Land
Contribution by Staff 2. Buildings
i) Township (Residential
and Welfare
Buildings)
ii) Canteen Buildings
3. Township Water
Supply & Sewrage
4. Township – Roads
5. Township –
Electrification
II. Other Social Assets
1. Hospital Equipments
2. Hospital Vehicle /
Ambulance
3. School Equipments
4. Club Equipments
5. Playground / Park
6. School Buses
7. Others
III. Human Assets
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Illustration 1
From the following information taken from the books of F Ltd. relating to
staff and community benefits, prepare a statement classifying the
various items under the appropriate heads:
Rs. Rs.
Environmental Improvements 20,10,000 Extra work put in by staff and 18,50,000

officers for
Medical facilities 45,00,000 drought relief
Training Programmes 10,25,000 Leave encashment and leave 52,00,000

Travel benefits
General of Job Opportunities 60,75,000 Educational facilities for

children of staff
Municipal Taxes 10,70,000 members 21,60,000
Increase in cost of living in Subsidised canteen facilities 14,40,000

the vicinity due
to a thermal power station 16,55,000 Generation of business 25,00,000
Concessional transport, 11,25,000

water supply
Solution
F LTD.
STATEMENT RELATING TO STAFF AND COMMUNITY BENEFITS
Rs.
I.Social Benefits and Cost of staff

A.Social Benefits to Staff :
1. Medical facilities 4,50,000
2. Training programmes 10,25,000
3. Concessional transport, water supply 11,25,000
4. Leave encashment and leave travel benefits 52,00,000
5. Educational facilities for children of staff members 21,60,000
6. Subsidised canteen facilities 14,40,000
Total 1,54,50,000
B.Social Costs to Staff

Extra work put in by staff and officers for drought relief 1,85,000
Net Social Benefits to Staff (A) – (B) 1,36,00,000
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II. Social Benefits and Costs to Community
A. Social Benefits to Community
1. Environmental improvements 20,10,000
2. Generation of job opportunities 60,75,000
3. Municipal taxes 10,70,000
4. Generation to business 25,00,000
Total 1,16,55,000
B. Social Costs Community

Increase in cost of living in the vicinity due to a thermal power
station 16,55,000
Social Benefits to Staff and Community 1,00,00,000
2,36,000
16.13 CORPORATE SOCIAL RESPONSIBILITY (CSR)
The Corporate Social Responsibility (CSR) is not a new concept in India.

Ever since the inception corporate like Bharat Petroleum, Birla Group,
Hindustan Unilever Indian Oil, and Tata Group ITC name a few are
involved in serving the community. Through donations and charity many
other organizations have also been doing their part for the society.
The essence of CSR comprises of philanthropic responsibility,
corporation responsibility, ethical responsibility, environmental
responsibility, and legal & economic responsibility. Put all together, the
alternative synonymous for CSR is People, Planet, and Profit, also
known as triple bottom line. CSR is slowly evolving in India and the
developed countries have even established standards for CSR. In
developed countries, however the law does not stipulate for mandatory
OSE contributions. Many European countries have, however, specified
that companies must include CSR information in their annual report.
In India, the evolution of CSR refers to the changes over time in cultural
norms of corporation’s engagement and the way business managed to
develop positive impact on communities, cultures, societies, and
environment in which those corporations operated.
16.13.1 Companies Act, 2013

The Companies Act, 2013 through Section 135, has introduced
mandatory provisions for CSR as applicable on certain classes of
companies. These provisions include the following:
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1. Companies following under any of the below mentioned criteria
shall have to mandatorily follow provisions of Section 135:
(a) Having a minimum net worth of 500 crore
(b) Having a minimum turnover of 1,000 crore, and
(c) Having a minimum net profit of 5 crore
2. Companies which fall under either of the above-mentioned criteria
shall have to constitute a Corporate Social Responsibility
Committee of the Board consisting of three or more directors, out
of which one shall be an independent director
3. Section 135 has established that the CSR Board shall ensure that
at least 2% of average net profits of the company made during the
three immediately preceding financial years shall be spent by the
company on its CSR activities. It should be noted that Act further
clarifies that average net profit shall be computed in accordance
with Section 196 of The Companies Act, 2013.
16.13.2 CSR Activities
The government has prescribed the following areas for making
expenditure on CSR activities:
i) Eradicating extreme hunger and poverty
ii) Promotion of Education
iii) Promoting gender equality and empowering women.
iv) Reducing child mortality and improving maternal health.
v) Combating human immunodeficiency virus, acquired immune
deficiency syndrome, malaria and other diseases.
vi) Ensuring environmental sustainability.
vii) Employment enhancing vocational skills.
viii) Social business projects;
ix) Contribution to the Prime Minister's National Relief Fund or any
other fund set up by the Central Government or the State
Governments for socioeconomic development and relief and
funds for the welfare of the Scheduled Castes, the Scheduled
Tribes, other backward classes, minorities and women; and
x) such other matters as may be prescribed.
LET US SUM UP
It is a widely accepted fact that success of any organisation, business, to
great extent depends upon the quality caliber and character of the
people working in it. But this importance was ignored by accountants till
1960. Only during 1960, as a result of various studies conducted by
different experts in the area of accounting and finance a new branch of
accounting known as Human Resources Accounting has come into
305
being. This accounting includes valuation of human resources, recording
the valuation and disclosure for this information in the financial
statement. Basically, there are two methods of valuation of Human
Resources viz., Human Resource Cost Accounting and Human
Resource Value Accounting. Human Resource Cost accounting is the
measurement and reporting of the cost incurred to acquire, develop and
replace people as organisation resources. In Human Resource Value
Accounting instead of cost, the value of individual at present and in
future to the organisaton is considered. In this method qualities, skills,
role in the organisations, future service etc., are considered. In India as
per section 217 of the Companies Act, the directors report should
include a statement showing the name of every employee of company
who is employed throughout the financial year was in receipt of
remuneration of 6 lakhs and above for that year. Except for this, Act
does not call for any disclosure regarding human resource accounting of
an enterprise.
CHECK YOUR PROGRESS
1. The first attempt to value human being in monetary terms was made
by
a) Williams Petty b) William c. Pyle
c) Shultz d) None of the above
2. The replacement cost approach for valuing Human Resources was
developed by
a) Pyle b) Rensis Linket
c) David Waston d) None of the above
3. Disclosure of the value of Human Resources in the financial
Statement in made as a
a) Part of financial statements
b) Supplementary information
c) Statutory obligation
4. Indian company are generally following human resource according to
model as suggested by
a) Morese b) Flamholtz
c) Lev and Schwartz d) None of the above
306
GLOSSARY
Human Resources : The process of identifying and

Accounting measuring the data about human
resources and communicating this
information to interested parties.
Investments in Human : The expenditure incurred for creating,

Resources increasing and up-dating the human
resources quality.
CSR : Corporate Social Responsibility is

legal, ethical and discretionary
expectations that society has of
organizations at given point of time.
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. HUMAN RESOURCE ACCOUNTING - Bing video
2. Human Resource Accounting (COM) - YouTube
3. Human Resource Accounting - Bing video
1.a) 2.b) 3.b) 4.c)
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UNIT 17
VALUED ADDED STATEMENT AND
ECONOMIC VALUE ADDED
STRUCTURE
Overview
Learning Objectives
17.1 Meaning and concept of value-added statement
17.2 Uses of the value added
17.3 Distraction between gross and net value added

17.4 Meaning of Economic value added
17.5. Calculation of Economic value added
17.5.1 Calculation of NOPAT

17.5.2 Calculation of capital employed
17.5.3 Calculation of weighted average cost of capital.
Let us sum up
Check your progress
Glossary
Suggested readings
OVERVIEW
This statement is a periodic statement and gives us an idea about the

value created by the enterprise during this period and as to how such
value is distributed among the various parties contributing to such value
creation. Basically, every organisation obtains certain inputs/factors and
after adding value sells the output. Thus, value added constitutes the
difference between the monetary value of outputs and inputs of goods
and services purchased by the business for carrying out its activity.
Value Added = Money value of output- Money value of inputs and services
The publication of this statement along with corporate report was

recommended by the Accounting Standards Steering Committee
(ASSC) in its publication Corporate Report published in 1975. This
committee is now known as the Accounting Standards Committee
308
(ASC). The publication of this statement in India is not mandatory but
many progressive firms give this statement in their published accounts.
In U.K. it is mandatory for large firms to publish this report.
LEARNING OBJECTIVES
After studying unit, you will be able to
•discuss the meaning and uses of value-added statement
•prepare value added statement on gross and net basis
•explain the meaning and concept of economics value added
statement.
• assess to calculate economic value added.
7.1 MEANING AND CONCEPT OF VALUE-ADDED STATEMENT
Value added is in the change in market value resulting from on alteration

in the form, location or availability of a product or service excluding the
cost of bought in material and services. It may be said that value added
the wealth created by the business during a particular period. The value
so added is distributed among the Constituents who created it, viz,
government investment, providers of loan Capital and shareholders.
The Institute of Chartered Accountants of India defined the term Value
Added as "The increase in market value resulting from an alteration in
the form, location or availability of a product or service excluding the cost
of bought in materials and services." Roger Bryant defined the Value
Added as, "The simplest and most effective way of putting profit into
proper perspective vis-a-vis the whole enterprise as a collective effort by
capital, management and employees is by presentation of Value Added.
Value Added is the wealth the reporting entity has been able to create by
its own and its employees' efforts. This statement would show how
Value Added has been used to pay those contributing to its creation.
17.2 USES OF THE VALUE ADDED
Profit is a micro concept while Value Added is a macro concept.
Therefore, the figure of profit measures the welfare of shareholders
while the figure of Value-Added measures the welfare of the society as a
whole. Following are important uses of calculating Value Added:
1. It measures social welfare as well as it shows categorically the

distribution of Value Added which in turn shows segment wise
welfare of the society.
2. It helps to compare overall productivity of two or more concerns of
the same nature
3. It helps to measure employee productivity and talks about the
opportunity cost of various resources used to generate value.
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4. It helps to determine the areas where improvement in productivity is
possible.
5. It helps to forecast resources needed for a particular level of activity;
thus, it helps in preparing budgets.
17.3 DISTINCTION BETWEEN GROSS VALUE ADDED AND NET
VALUE ADDED
Distinction between Gross Value Added and Net Value Added hinges
upon the treatment of depreciation one view is to treat it as part of
distribution and is to be included under reinvestment in business. The
other view is to treat it as input value and deduct the same to arrive at
net value added. Many companies prefer to treat depreciation as an
appropriation and thus show value added on gross basis rather than net
basis. The distinction between the two concepts may be stated in the
form of equations.
Gross Value Added (GVA)

Here value added is arrived at by treating depreciation as an
appropriation and not as an input. Mathematically,
R = S-B-D-W-I-T-Di
R = Retained profit
S = Sales
B = Bought in cost of materials and services

D = Depreciation
W = Wages, etc
I = Interest
T = Taxes
Di = Dividends
The equation cab ne restated as:

S-B = R+D+W+I+T+ Di
S-B = Gross value added
The right-hand side of the equation shows how gross value is applied
Net Value Added (NVA)
Under this approach depreciation is subtracted from gross value to
arrive at net value. Thus S-B-D = R+W+I+T+Di
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As stated already many companies prefer to report on the basis of Gross
Value Added. The 'Corporate Report' of U.K. also favoured reporting on
gross basis.
Note – There is Controversy as to whether value of sales or Valve of
production should be considered usually value of sales is considered.
In the same way, extraordinary items are not considered. And also
interest and dividend on investments made outside the business.
Illustration 1. You are given the summarized trading and profit and loss
account of VAT Ltd., for the year ended 31st March 2002:
Particulars Rupees Rupees

Sales (excluding VAT (value added tax) 3,50,000
Less : Cost of sales 2,00,000
Gross profit 1,50,000
Less :
Wages and salaries 30,000
Operating expenses interest paid 15,000
Depreciation 15,000
Interest paid 10,000
Excise duty 30,000 1,00,000
Profit before tax 50,000
Less : Provision for taxation 20,000
Profit after tax 30,000
Less: Dividends 15,000
Retained profits 15,000
Required :
a)A statement of value added on gross basis and

b)A statement of value added on net basis.
Solution (a)
VAT (on Gross Basis)
for the year ending March 31, 2002)
Particulars Rupees %
Sales (excluding VAT) 3,50,000

Less : Cost of bought in material & services 2,15,000
Total value added 1,35,000 100%
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Application of value added
Employees, wages and salaries 30,000 22.22
Government
Taxes and Excise duty 50,000 37.03
Providers of capital 25,000 18.52
Interest and Dividends
Business (retention for expansion)
Depreciation and retained profits 30,000 22.23
Total of Applications 1,35,000 100.00
Reconciliation between Total Value Added and PBT

Add back
Depreciation 15,000
Wages and salaries 30,000
Excise duty 30,000
Interest paid 10,000 85,000
Total value added 1,35,000
Note. Excise duty is treated as an appropriation and therefore not

deducted to arrive at the value added. There are some who do not treat
it as an appropriation and therefore deduct it from sales for arriving at
value added. The general reference is to treat it as an appropriation.
b) VAT (on Net Basis) for the year ended March 31, 2002
Sales (excluding VAT) 3,50,000

Less: Cost of bought in materials and
services 2,15,000
Gross Value added 1,35,000

Less: Depreciation 15,000
Net Value added 1,20,000 100%
Applied as shown below:

Employees- (wages & Salaries) 30,000 25%
Government –(Taxes& excise) 50,000 41.67%
312
Providers of Capital (Int. & Div.) 25,000 20.83%
Business (profit retained) 15,000 12.50%
Total of applications 1,20,000 100.00
Reconciliation between Total Value Added and PBT
Add
Excise duty 30,000
Wages & Salaries 30,000
Interest paid 10,000 70,000
Total value added 1,20,000
17.4 MEANING OF ECONOMIC VALUE ADDED

EVA is a financial performance method used to calculate the true
economic profit of an enterprise. It is a method of estimating the amount
by which profits exceed the required minimum return for shareholders or
lenders.
EVA = Net Operating profit after taxes – cost of capital employed
The consultancy firm stern Stewart came up with a performance

measure that takes into account the minimum returns required by the
shareholders, called Economic Value added”.
17.5 CALCULATION OF ECONOMIC VALUE ADDED
Economic Value Added (EVA) measures the economic rather than
accounting profit created by a business after the cost of all resources
including both debt and equity capital have been taken into account.
Economic value added (EVA) is a financial measure of what economists
sometimes refer to as economic profit or economic rent. The difference
between economic profit and accounting profit is essentially the cost of
equity capital – an accountant does not subtract a cost of equity capital
in the computation of profit, while an economist charges for all resources
in his computation of profit-including an opportunity cost for the equity
capital invested in the business.
313
Calculation of Economic Value Added (EVA)
Amount (Rs.)
Earning before interest and Taxes (EBIT) xxx
Less : Interest xxx
Net Income xxx
Less : Cost of Equity Capital xxx
Economic Value Added (EVA) xxx
EVA is the return a firm earns in excess of the minimum required return
by the investors. As for the formal definition, EVA is calculated using the
following formula:
EVA = NOPAT –(WACC x CE)

where NOPAT= Net Operating Profit After Tax
WAC = Weighted Average cost of capital
CE = Capital Employed
One particular point to note is that the EVA calculated above is a rupee
figure and not a percentage i.e. EVA measures the absolute rupee value
of wealth created. Further EVA calculation removes the distribution
between the providers of capital because the total capital employed in
the business is taken, whether provided by shareholders or creditors.
The EVA figure measures the value added after the claims or
expectations of each of the group of capital providers have been met.
17.5.1 Calculation of NOPAT (Net Operating Profit After Tax)
NOPAT is measured from the income statement by adding back interest

payments and subtracting and adding non-operating income and
expenses, respectively to net profit figure and after making certain other
adjustments which turn accounting profit into economic profits.
17.5.2 Calculation of capital employed
The next element required for calculating EVA is the capital employed.
Capital employed consists of adjusted equity shareholders fund, all
interest-bearing obligations and Preference capital (if any). The capital
employed can be calculated through the assets side of the balance
sheet or the liability side. From the asset side, capital employed is the
current assets less the non-interest bearing current liabilities i.e. the net
working capital (current assets – non interest bearing current liabilities)
314
plus the net fixed assets. From the liabilities side it is the sum of interest-
bearing debt (short –term as well as long term) and net worth less any
non-operating assets.
It is decided to use the capital employed with beginning of the year for
calculating EVA, as this was the capital available for management to
earn the returns.
17.5.3 Calculation of Weighted Average Cost of capital
The third element in EVA calculation is the cost of capital, which is the
weighted average of the cost of debt, cost of equity and cost of
preference capital with weights equivalent to the proportion of each in
the total capital while the cost of debt is the average interest rate paid by
the company on its debt, the cost of equity can be found out using the
capital asset price model (CAPM) and the cost of preferences shares
can be taken as the fixed rate of dividend.
Illustration 2. Pilot Ltd. supplies the following information using which

you are required to calculate the economic value added.
• Financial Leverage 1.4 times
• Capital (equity and debt) Equity shares of Rs.1,000 each 34,000
(number)
Accumulated Profit Rs. 260 lakhs
10 per cent Debentures of 10 each 80 lakhs (number)
• Dividend expectation of equity shareholders 17.50%
• Prevailing Corporate Tax Rate 30%
Solution
Computation of Economic Value added
Rs. in lakhs
Net Profit Tax (1) 140
Add: Interest (adjusted for Tax Effect (800 x10%x0.70) 56
196
Less : Cost of Capital (2) 161
Economic Value Added (EVA) 35
315
Working Notes:
(1) Calculation of Profit after Tax
Profit before Interest & Taxes (PBIT)

Financial Leverage =
Profit before Tax (PBT)
Interest on Borrowing = Rs. 800 lakhs x 10% = Rs. 80 lakhs.
Therefore ,
1.40 PBIT
=
PBIT − Interest
1.40 PBIT
=
PBIT − 80
1.40 (PBIT -80) = PBIT
1.40 (PBIT – 112 = PBIT
1.40 (PBIT –PBIT) = 112
0.40 PBIT = 112
PBIT = 112/0.40
PBIT = Rs. 280 lakhs
PBT= PBIT – I= 280-80 = Rs. 200 lakhs
Tax (30%) = Rs.60 lakhs
Net Profit after Tax = Rs. 140 lakhs
(2) Cost of Capital

Rs. (in lakhs)
600
Equity Shareholders’ Funds
800
10% Debenture holders’ Funds
1,400
Total
Rs. 600 lakhs

Weighted Assigned to Equity shareholders Fund = = 0.4286
Rs.1,400 lakhs
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Rs. 800 lakhs
Weighted assigned to Debenture holders Fund = = 0.5714
Rs.1,400 lakhs
Amount (Rs. Weight Cost % WACC %
Source of Funds (5) = (3 x4)%
in lakhs) (3) (4)
600 0.4286 17.50 7.50
Equity shareholders Funds
800 0.5714 7.00 4.00
Debenture holders ‘ Funds
1400 10,000 …. 11.50
Total
Cost of Capital = Average Capital Employed x Weighted Average Cost

of Capital (WACC)
= Rs.1400 lakhs x 11.50% = Rs. 161 lakhs.
Illustration 3. Vijay Ltd. furnishes the following information from which
you are required to calculate the Economic Value Added (EVA) of the
company and also explain the reason for the difference, if any, between
the EVA as calculated by you and the MVA (Market Value Added) of
Vijay Ltd. amounting to Rs.7010 crores.
79,10,000 Shares
Common share of Rs.10 face value (MVA)
2,50,000 Debentures
10% Debentures of Rs. 100 face value
30%
Tax Rate
1.1 Times
Financial Leverage
54
Capital Reserves (Rs. in lakhs)
75
Free Reserves (Rs. in lakhs)
80
Securities Premium (Rs. in lakhs)
It is common practice for companies in the industry to which Vijay Ltd.

belongs to pay atleast a dividend of 12% p.a. to its common
shareholders.
Solution
Computation of Economic Value Added
Rs. in lakhs
192.50
NOPAT
(137.50)
Less: Cost of Capital
55.00
Economic Value Added
Working Notes :
1. Calculation of Net Profit before interest and Tax
Interest on Debentures = 2,50,000 units x 100 x 10% = Rs.25,00,000
Profit before Interest & Taxes (PBIT)
Therefore, Financial Leverage =
PBIT less Interest
317
PBIT
1.10.1 =
PBIT - Rs.25,00,000
1.10 (PBIT – Rs.25,00,000)=PIBT
1.10 PBIT – PBIT = Rs. 27,50,000

0.10 PBIT = Rs. 27,50,000
PBIT = Rs.2,75,00,000.
2. Calculation of NOPAT
NOPAT = PBIT –Interest – Tax + Interest (net of tax)
or
NOPAT= PBIT – Tax
NOPAT= Rs.2,75,00,000 x (1-0.3) = Rs.1,92,50,000.
3. Calculation of weighted Average Cost of Capital (WACC)
WACC %
Rs. in Rs. in Cost
Weight (2)
lakhs lakhs (1) % (3) (4)= 2x3)
Equity
shareholders Fund
Common shares 791
Securities 80
Premium
Free Reserves 75
Capital Reserves 54
1,000 0.80 12 9.6
Debenture 250 0.20 7* 1.4

holders’ Fund
1,250 1.00 11.00
Cost of capital = Capital Employed x WACC%

= Rs. 1,250lakhs x 11%
= Rs.137.50 lakhs.
*Rate of interest on debentures is taken net of tax of 30%.
LET US SUM UP
Value added is the change in market value resulting from an alteration in
the form, location or availability of a product or service excluding the cost
of bought-in- material and services. It is the difference between the sales
revenue and the cost of bought-in-materials and services. It can also be
defined as the wealth the organization has created by its own and its
employees’ efforts and shows the return made to those who took part in
creating the wealth. In this sense it will be calculated by taking the total
318
of employee’s costs, interest on loans, dividend, Government taxes,
depreciation and retained profits. In other words, value added is pre-tax
profit plus employee’ costs, interest, and depreciation.
To overcome the limitations of accounting-based measures of financial
performance, Stern Stewart & co. postulated a modified concept of
economic income in 1990 in the name of Economic Value Added which
as a measure of performance overcomes many of ROI’s inherent
Limitation.
CHECK YOUR PROGRESS
1. Value added = ___________
a) Money value of output – Money value of inputs
b) Money value of sales – Depreciation
c) Money value of purchase + Depreciation
2. Gross value added is treating depreciation as _________
a) input value b) appropriation
c) share holders’ fund d) none of the above
3. The difference between economic profit and accounting profit is
essentially the cost of ________
a) net fixed asset b) equity capital
c) external fund d) none of the above
4. Value added may be classified as
a) input value and output value
b) external fund and internal fund
c) gross and net
GLOSSARY
Value added : The increase in market value resulting

from alteration of a product, excluding
the cost of purchase.
Gross value added : The value arrived at by treating

depreciation as an appropriation and
not as an input.
Net value added : The value arrived at by treating

depreciation as input value and thus
deducted from gross value.
319
Economic value added : It is the amount by which profit exceeds
the required minimum return for share
holders or lenders.
SUGGESTED READINGS
New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. CA Final | Preparing a Gross Value Added Statement from P&L
Account - YouTube
2. Economic Value Added EVA - Bing video
3. Economic Value Added - Bing video
1. a) 2.b) 3.b) 4.c)
320
UNIT 18
ACCOUNTING IN COMPUTERISED
ENVIRONMENT
STRUCTURE
Overview
Learning Objectives
18.1 Introduction
18.2 Role of the Computer in Accounting
18.3 Features of Computerized Accounting Environment

18.4 Comparison between Manual and Computerized Accounting
18.5 Advantage of Computerized Accounting
18.6 Accounting Software

18.6.1 Tally - Introduction
Let us sum up
Check your progress

Glossaries
Suggested readings
OVERVIEW
Computerized accounting system is a software that helps businesses to
manage the big financial transactions, data, reports, and statements with
high efficiency, speed, and better accuracy. Better quality work, lower
operating costs, better efficiency, greater accuracy, minimum errors are
some of the advantages of Computerized Accounting. Let us learn more
about Computerized accounting environment.
LEARNING OBJECTIVES

• state the role of computer in accounting.
• compare the manual accounting with computerized
accounting
• explain the features of computerized accounting environment
• discuss some basic accounting softwares.
321
18.1 INTRODUCTION
Before discussing Computer Accounting System, it is desirable to have
some idea relating to various aspects of computer and its related terms.
The word 'computer' comes from the word 'compute' which means to
calculate. The initial objective for inventing the computer was to create a
fast-calculating machine. However, now-a-days more than 80% of the
work done by computers is of non-mathematical nature. In real sense
computer may be defined as a device that processes information or
data.
Data can be like biodata of various applicants when computer is used for
recruiting personnel, or the marks obtained by various students in
various subjects when the computer is used to prepare results or
numbers of different types in case of application of computers for
scientific research problems, etc.
Data may come in various shapes and sizes depending upon the type of
computer application. A computer can store, process, and retrieve data
as and when desired. For this reason computers are also known as data
processor. Data processor can gather data from various incoming
sources, merge (process of mixing) them all, sort (arranging in some
sequence-ascending or descending) them in a desired order and print
them in the desired format.
18.2 ROLE OF THE COMPUTER IN ACCOUNTING
Computers play a very important role in the field of accounting. They can
be used as accounting machines and perform all the functions which
accounting machines perform as described earlier Home of the
important accounting functions which they perform are given below:
a) Transaction Recording
One of the basic functions of accounting is recording of the financial
transactions that take place in a business unit. Transactions must be
recorded accurately and regularly for making available up-to-date
accounting information to the management; Manual accounting may not
be able to keep pace with the increase in the size of the business. In
manual accounting transactions may be recorded accurately but it is
possible that error may be committed in posting and there may be delay
in posting. In computers, the operations of recording and posting are
done with one entry at a great speed, the result is that all records
become automatically correct if original entry is correct. With the use of
computers up-to-date information relating to recording of transactions is
available to the management in time for taking timely decisions. Ledgers
322
contain up-to-date information and balance of any account at any time
available without any loss of time. Printed bills and printed cheques can
also be made available by the use of computers. By using computers,
space and paper required for the storage of accounting records is
reduced. Time required for the maintenance of accounts is considerably
reduced because computers can do the accounting work at a very high
speed,
b) Payroll Accounting
Computers are very helpful in payroll accounting. Every business
enterprise is required to calculate the wages and salaries due to each
worker and employee. For this payroll for each department and a
permanent payroll record for each employee is required, so that there
may be timely distribution of wages and salaries. Manual handling of
payroll accounting of a business enterprise employing hundreds and
thousands of employees may take a long time and errors may be
committed in the calculations of wages and salaries due to employees
resulting into incorrect and delayed payment of wages and resentment
among employees. Computerized payroll accounting can solve all these
problems and can ensure prompt and accurate distribution of wages and
salaries. It will help in keeping employees of the business enterprise
satisfied.
c) Inventory Control
The objective of inventory control is to provide material for production at
economical prices, at right time, in right quantity and quality. Computers
help in controlling the inventories by generating the reports at speed and
with accuracy. These reports are like stock ledger, value stock and
statement, statement of stock out. rejections, purchase etc. Moreover,
accounting through computer increases the accessibility of all
departments to the information required as soon as the information is fed
the software. Through the use of ERP systems, the information as to
when the inventory is required can be extracted by the suppliers. This
will reduce the time lags and thereby reduce cost.
18.3 FEATURES OF COMPUTERIZED ACCOUNTING

ENVIRONMENT
This Accounting System and its awareness among entities have become
a necessity in the present environment businesses of whatever field and
size are shifting from the practice of maintaining accounts manually. The
manual process is more time-consuming and exposed to human error.
323
Storage and retrieval of data and generation of a report cannot be
ensured in real time in the traditional system. There is a need to shift to
computerized accounting systems. They have empowered business to
project accurate information of financial performance.
1. Simple and Integrated: It helps all businesses by automating
and integrating all the business activities. Such activities may be
sales finance, purchase, inventory, and manufacturing etc. It also
facilitates the arrangement of accurate and up-to-date business
information in a readily usable form.
2. Accuracy & Speed: Computerized accounting has customized
templates for users which allows fast and accurate data entry.
Thus, after recording the transactions it generates the information
and reports automatically.
3. Scalability: It has the flexibility to record the transactions with the
changing volume of business
4. Instant Reporting: It can generate a quality report in real time
because of high speed and accuracy.
5. Security: Secured data and information can be kept confidential
as compared to the traditional accounting system.
6. Quick Decision Making: This system Generates real-time,
comprehensive MIS reports and ensures access to complete and
critical information, instantly
7. Reliability: in generates the report with consistency and
accuracy. Minimization of errors makes the system more reliable.
8. Complete Visibility : It given the company sufficient time to plan,
increase the customer base and enhance customer satisfaction.
with this computerized accounting, the company will have greater
visibility into the day to day business operation and vital
information.
9. Power: It has the ability to handle huge volume of transactions
without compromising or speed on efficiency.
18.4 COMPARISON BETWEEN MANUAL AND COMPUTERIZED
ACCOUNTING
Accounting is the process of identifying, recording, classifying and
summarizing financial transactions to make financial statements and to
interpret these for final analysis.
• Identification. The identification of transactions using accounting
principles is same and common in both manual and computerized
accounting system.
324
• Recording. Recording in manual accounting is through books of
original entry (Journal and then to Ledgers) while the data is
stored in well designed accounting database in Computerized
System.
• Classification. In manual system, transactions recorded in books
of original entry (Journal) are then classified by posting to Ledger
accounts. This results in recording the entries once again. This
means there is duplicacy of work. In computerized accounting
system there is no such duplicacy. The stored transactions are
processed and classified in the form of Ledger accounts by the
inbuilt functions of the software. The basic data can be processed
in different kinds of reports.
• Summarizing. In manual system, the transactions are
summarized by ascertaining the balances of all accounts to make
Trial Balance. Preparation of Ledger accounts become
prerequisite for preparing the Trial Balance. However, in
computerized system, the original data is processed and gives the
output in the form of Trial Balance. The preparation of various
accounts in the Ledger is not a necessary step in case of
computerized accounting system
• Financial Statements. In manual system, in order to prepare
financial statements, Trial Balance is a must. However, in case of
computerized accounting, the generation of financial statements is
independent of Trial Balance and such statements can be
prepared by direct processing from the data originally stored in
accounting database. Conceptually the accounting process is
same irrespective of technology being used
18.5 ADVANTAGES OF COMPUTERIZED ACCOUNTING
1. Better Quality Work: The accounts prepared with the use of
computerized accounting system are usually uniform, neat,
accurate, and more legible than a manual job.
2. Lower Operating Costs: Computer is a reliable and time-
saving device. The volume of job handled with the help of
computerized system results in economy and lower operating
costs. The overall operating cost of this system is low in
comparison to the traditional system.
3. Improves Efficiency: This system is more efficient in
comparison to the traditional system. The computer makes
sure speed and accuracy in preparing the records and
accounts and thus, increases the efficiency of employees.
325
4. Facilitates Better Control: From the management point of
view, there is greater control possible and more information
may be available with the use of the computer in accounting.
It ensures efficient performance in accounting records.
5. Greater Accuracy: Computerized accounting make sure
accuracy in accounting records and statements. It prevents
clerical errors and omissions in records.
6. Relieve Monotony: Computerized accounting reduces the
monotony of doing repetitive accounting jobs. Which are
tiresome and time consuming.
7. Facilitates Standardization: Computerized accounting
provides standardization of accounting routines and
procedures. Therefore, it ensures standardization in the
accounting records.
8. Minimizes Mathematical Errors: While doing mathematical
work with computers, errors are virtually eliminated unless
the data is entered improperly in the system.
18.6 ACCOUNTING SOFTWARES
Earlier when accounting software were not in use, businesses had to
spend resources and time to maintain huge data of accounts
department. Transfer of data from one department to other took long
time. Maintenance of data manually also lead to more chances of errors.
In order to overcome these limitations the business organizations have
started depending on computers for accounting
For this purpose, various accounting tools are available for recording the
business transactions like Spread Sheet, Pre-Packaged Accounting
Software, and Customized Software etc. Larger organizations are also
using ERP (Enterprises Resource Planning) Package to manage the
business process across all branches and departments.
Spread Sheet:
Accounting can also be maintained on spread sheet package by using
the knowledge and skills of spread sheet software to record and control
the business transactions. Spread sheet provides the facility of physical
control of data by protected shared drive, with restricted access and
read/write access, and provides password protection on cells and
formulas.
Apart from above, spread sheet also allows grouping of accounts,
replication of cell contents, formulas & macro, pivot tables, calculations
and functions to maintain the accounting records in computer
326
Pre-Packaged Software:
Along with so many advantages, spread sheet has its own limitations as
well like double entry & reports are not processed automatically in
spread sheet without any formula. Therefore, spread sheet is not useful
for large organization where large volume of data is involved in business
transactions.
Pre-packaged software are available in market and specially designed
for some small and medium size organization to maintain computerized
records. These softwares are available in compact disk (CD) which is
very easy to install and use to records the accounting transaction in
personal computer with the help of these softwares. A network version of
these softwares is also available in market that can perform from various
workstation and client system attached with network. This software is
required to install in the server to administrate all the client system and
records all transaction electronically with the help of network.
Customized Accounting Software : Pre-packaged software are really
useful to fulfill the business needs to maintain computerized records.
However, Pre-packaged softwares are standard accounting package
which are based on predefined rules and principles. Businesses are
growing and becoming more complex in which standard package may
not able handled these complexities. So customised softwares are
specially designed for the requirement of any specific organisation.
Enterprises Resources Planning (ERP): Accounting softwares are
designed to fulfil and integrate the requirement of all accounting
functions of organisation. However, ERP is designed to integrate all
business process across the entire enterprises. This is automatically
updated software as per the latest changes and requirement of
organisation that is the main limitation of customised software and other
accounting softwares. However, other accounting softwares are not
compatible to adapt the changes of law and function of organisation.
18.6.1 Tally - Introduction
Tally is the most popular and widely accepted software because of it
simplicity, flexibility and speed. Over a period of time, tally as a software
for financial accounting has evolved into powerful tool for providing
business solutions. Different versions of Tally available in market are
Tally 5, Tally 7.2, Tally 9 Tally ERP 9.
Tally has moved from single user environment to multi-user
environment. The latest version Tally ERP 9 has been improved a lot
from the previous versions as it permits integration of data at various
327
geographical locations. This software provides complete business
solutions and it integrates the functionalities of various departments such
as inventory, payroll accounts etc. It provides fast reports. Tally comes
with simple user friendly interface and it is easy to install.
LET US SUM UP
One must remember that the basic fundamentals of accounting remain
same whether the book of accounts are maintained manually or are
computerized. The principles of debit and credit remain same while
recording the transactions of income, expenditure, purchase or sales.
However, since the medium of recording is different in case of
computerized accounting, the dependence on software being used is
high. Selection of software and its use require certain precautions as
well. Every business has numerous processes. Some are simple and
others complex In addition to this when the volumes of the business
increase, the company will need to maintain highly accurate and up-to-
date accounting records.
The need of the Computerized Accounting system arises because of the
advantages offered by it in terms of speed, accuracy and lower costs.
Computerized accounting system helps to simplify and streamline all the
business processes cost effectively.
CHECK YOUR PROGRESS
1. _________ is the most popular and widely accepted software.
a) Tally b)Speed sheet
c) Pre-packaged software d) none of the above
2. The basic types of computers are __________
a) Digital computers b) analogy computers
c)a and b d) none of the above
3. Physically the main component of the computer is the ________
a) display b) input unit
c)central processing unit d) none of the above
4. ERP means ___________
a) Easy Resources Planning b) Enterprises Resources Planning
c)Enterprises Rapid plan d) none of the above
328
GLOSSARY
ERP (Enter Prices : It is an accounting software designed to

Resources Planning) integrate all business process across the
entire enterprises.
Tally : Wide by accepted accounting software for

financial accounting because of its
simplicity, flexibility and speed.
Computer : Comes from the word “compute” which

means to calculate. A device that
processes information or data.
SUGGESTED READINGS

New Delhi.
Pearson, New Delhi.
WEB RESOURCES
1. Important Roles of Computers in Accounting - Bing video
2. What are the Advantages and Disadvantages of Computerised
Accounting System?| A Level Accounting - Bing video
3. Best Practices for Evaluating and Selecting Accounting Software
Webinar - YouTube
1.a) 2. c) 3. c) 4. b)
329
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Master of Commerce

School of Management Studies

COURSE OBJECTIVES (CO)

CO1. Describe the concept of Customer Relationship Management

BLOCK I: Introduction to CRM

CRM concepts: Theoretical perspectives of relationship -CRM

1. Garikaparthi, Madhavi, (2002) CRM – The New Face of Marketing;

1. customer relationship management - Bing video

COURSE OUTCOMES (CLO)

On completion of this course, learners would be able to

11.1 Introduction 122

15.4 Ten determinants of service quality 172

UNIT 1 : CUSTOMER DATA BASE ANALYSIS

UNIT 2 : CUSTOMER PERCEPTION

CUSTOMER DATA BASE ANALYSIS

1.3 Information to be included in customer database

1.3.3 Benefits of a customer database

1.6 Some demographic changes those are likely

1.7 Factors influencing customer expectations of services

Check your progress

Answer to check your progress

The true business of every company is to make and keep customers.

• Strategic CRM: Data about markets, market offering, customers,

• Customer information fields

1.5.1 Components of Customer Profile

1. Generational cohorts (buddies or followers)

• Members of the generation groups are linked through shared

d) Working patterns (The trend of more women's to enter into

• During the post-purchase phase

2. Which of the following options includes relationship management with

4. The ___ of CRM deals with communication between companies and

5. Which among the following is defined as an ability to track and

2.1.2 Factors Influencing Customers Perception Analysis

2.3.1 Customer Behaviour in Relationship Perspective

Answer to check your progress

After studying this unit, you will be able to:

• examine individual and group behaviour of customers.

2.1.2 Factors Influencing Customers Perception Analysis

f. Selective perception process

• Organization clearly understands the benefits wanted by

i. Factors Influencing Consumer Behaviour

c. Roles and status

Fig.2.1. Factors Influencing Consumer Behaviour

5. First step in analysis of customer value is to

CUSTOMER LIFETIME VALUE

3.2 Customer Lifetime Value

Check your progress

• describe the concepts and importance of customer lifetime value

3.2 CUSTOMER LIFETIME VALUE

If a firm could move from an average share of expenditure of 30% to an

New Products – New Customers: This growth strategy is one of

b) Give flexible support for the server database

2. Which of the following options is linked to order management?

Customer Journey : A customer’s entire purchase lifecycle, from

CRM : Customer Relationship Management — or

Lead : A potential customer in the initial phase of

Cases : Cases are complaints, consumer reviews, or

Custom Links : Custom Links are one-of-a-kind links that