The relationship between a banker and a customer depends on the activities; products or services provided by bank to its customers or availed by the customer. Thus the relationship between a banker and customer is the transactional relationship. Bank’s business depends much on the strong bondage with the customer. “Trust” plays an important role in building healthy relationship between a banker and customer.
Definition of a ‘BANKER’
The Banking Regulations Act (B R Act) 1949 does not define the term ‘banker’ but defines what banking is?
As per Sec.5 (b) of the B R Act “Banking' means accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise."
As per Sec. 3 of the Indian Negotiable Instruments Act 1881, the word “banker includes any person acting as banker and any post office savings bank”.
According to Sec. 2 of the Bill of Exchange Act, 1882, ‘banker includes a body of persons, whether incorporated or not who carry on the business of banking.’
Sec.5(c) of BR Act defines "banking company" as a company that transacts the business of banking in India. Since a banker or a banking company undertakes banking related activities we can derive the meaning of banker or a banking company from Sec 5(b) as a body corporate that:
(a) Accepts deposits from public.
(b) Lends or
(c) Invests the money so collected by way of deposits.
(d) Allows withdrawals of deposits on demand or by any other means.
Accepting deposits from the ‘public’ means that a bank accepts deposits from anyone who offers money for the purpose. Unless a person has an account with the bank, it does not accept deposit. For depositing or borrowing money there has to be an account relationship with the bank. A bank can refuse to open an account for undesirable persons. It is banks right to open an account. Reserve Bank of India has stipulated certain norms “Know Your Customer” (KYC) guidelines for opening account and banks have to strictly follow them.
In addition to the activities mentioned in Sec.5 (b) of B R Act, banks can also carry out activities mentioned in Sec. 6 of the Act.
Who is a ‘Customer’?
The term Customer has not been defined by any act. The word ‘customer’ has been derived from the word ‘custom’, which means a ‘habit or tendency’ to-do certain things in a regular or a particular manner’s .In terms of Sec.131 of Negotiable Instrument Act, when a banker receives payment of a crossed cheque in good faith and without negligence for a customer, the bank does not incur any liability to the true owner of the cheque by reason only of having received such payment. It obviously means that to become a customer account relationship is must. Account relationship is a contractual relationship.
It is generally believed that any individual or an organisation, which conducts banking transactions with a bank, is the customer of bank. However, there are many persons who do utilize services of banks, but do not maintain any account with the bank.
Thus bank customers can be categorized in to four broad categories as under:
(a)Those who maintain account relationship with banks i.e. Existing customers.
(b)Those who had account relationship with bank i.e. Former Customers
(c)Those who do not maintain any account relationship with the bank but frequently
visit branch of a bank for availing banking facilities such as for purchasing a
draft, encashing a cheque, etc. Technically they are not customers, as they do
not maintain any account with the bank branch.
(d)Prospective/ Potential customers: Those who intend to have account relationship
with the bank. A person will be deemed to be a 'customer' even if he had only
handed over the account opening form duly filled in and signed by him to the bank
and the bank has accepted the it for opening the account, even though no
account has actually been opened by the bank in its books or record.
The practice followed by banks in the past was that for opening account there has to be an initial deposit in cash. However the condition of initial cash deposit for opening the account appears to have been dispensed with the opening of ‘No Frill’ account by banks as per directives of Reserve Bank of India. ‘No Frill’ accounts are opened with ‘Nil’ or with meager balance.
The term 'customer' is used only with respect to the branch, where the account is maintained. He cannot be treated as a ‘customer' for other branches of the same bank. However with the implementation of’ ‘Core Banking Solution’ the customer is the customer of the bank and not of a particular branch as he can operate his account from any branch of the bank and from anywhere. In the event of arising any cause of action, the customer is required to approach the branch with which it had opened account and not with any other branch.
‘Know Your Customer’ Guidelines and Customer:
As per ‘Know Your Customer’ guidelines issued by Reserve Bank of India, customer has been defined as:
(i)A person or entity that maintains an account and/or has a business relationship
with the bank;
(ii)One on whose behalf the account is maintained (i.e. the beneficial owner);
(iii)Beneficiaries of transactions conducted by professional intermediaries, such as
Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the
law, and
(iv)Any person or entity connected with a financial transaction, which can pose
significant reputational or other risks to the bank, say, a wire transfer or
issue of a high value demand draft as a single transaction.
Banker-Customer Relationship:
Banking is a trust-based relationship. There are numerous kinds of relationship between the bank and the customer. The relationship between a banker and a customer depends on the type of transaction. Thus the relationship is based on contract, and on certain terms and conditions.
These relationships confer certain rights and obligations both on the part of the banker and on the customer. However, the personal relationship between the bank and its customers is the long lasting relationship. Some banks even say that they have generation-to-generation banking relationship with their customers.The banker customer relationship is fiducial relationship. The terms and conditions governing the relationship is not be leaked by the banker to a third party.
Classification of Relationship:
The relationship between a bank and its customers can be broadly categorized in to General Relationship and Special Relationship.
If we look at Sec 5(b) of Banking Regulation Act, we would notice that bank’s business hovers around accepting of deposits for the purposes of lending. Thus the relationship arising out of these two main activities are known as General Relationship. In addition to these two activities banks also undertake other activities mentioned in Sec.6 of Banking Regulation Act. Relationship arising out of the activities mentioned in Sec.6 of the act is termed as special relationship.
General Relationship:
Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and signs the account opening form. By signing the form he enters into an agreement/contract with the bank. When customer deposits money in his account the bank becomes a debtor of the customer and customer a creditor. The money so deposited by customer becomes bank’s property and bank has a right to use the money as it likes. The bank is not bound to inform the depositor the manner of utilization of funds deposited by him. Bank does not give any security to the depositor i.e. debtor. The bank has borrowed money and it is only when the depositor demands, banker pays. Bank’s position is quite different from normal debtors.
Banker does not pay money on its own, as banker is not required to repay the debt voluntarily. The demand is to be made at the branch where the account exists and in a proper manner and during working days and working hours.
The debtor has to follow the terms and conditions of bank said to have been mentioned in the account opening form. {Though the terms and conditions are not mentioned in the account opening form, but the account opening form contains a declaration that the terms and conditions have been read and understood or has been explained. In fact the terms and conditions are mentioned in the passbook, which is issued to the customer only after the account has been opened.}
In the past while opening account some of the banks had the practice of giving a printed handbill containing the terms and conditions of account along with the account opening form. This practice has since been discontinued. For convenience and information of prospective customers a few banks have uploaded the account opening form, terms and conditions for opening account, rate charge in respect of various services provided by the bank etc., on their web site.
While issuing Demand Draft, Mail / Telegraphic Transfer, bank becomes a debtor as it owns money to the payee/ beneficiary.
2. Creditor–Debtor: Lending money is the most important activities of a bank. The resources mobilized by banks are utilized for lending operations. Customer who borrows money from bank owns money to the bank. In the case of any loan/advances account, the banker is the creditor and the customer is the debtor. The relationship in the first case when a person deposits money with the bank reverses when he borrows money from the bank. Borrower executes documents and offer security to the bank before utilizing the credit facility.
In addition to opening of a deposit/loan account banks provide variety of services, which makes the relationship more wide and complex. Depending upon the type of services rendered and the nature of transaction, the banker acts as a bailee, trustee, principal, agent, lessor, custodian etc.
Special Relationship:
1. Bank as a Trustee:
As per Sec. 3 of Indian Trust Act, 1882
‘ A "trust" is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.’ Thus trustee is the holder of property on behalf of a beneficiary.
As per Sec. 15 of the ‘Indian Trust Act, 1882 ‘A trustee is bound to deal with the trust-property as carefully as a man of ordinary prudence would deal with such property if it were his own; and, in the absence of a contract to the contrary, a trustee so dealing is not responsible for the loss, destruction or deterioration of the trust-property.’ A trustee has the right to reimbursement of expenses (Sec.32 of Indian Trust Act.).
In case of trust banker customer relationship is a special contract. When a person entrusts valuable items with another person with an intention that such items would be returned on demand to the keeper the relationship becomes of a trustee and trustier. Customers keep certain valuables or securities with the bank for safekeeping or deposits certain money for a specific purpose (Escrow accounts) the banker in such cases acts as a trustee. Banks charge fee for safekeeping valuables
2. Bailee – Bailor:
Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and "bailee".
A "bailment" is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
The person delivering the goods is called the "bailor". The person to whom they
are delivered is called, the "bailee".
Banks secure their advances by obtaining tangible securities. In some cases physical possession of securities goods (Pledge), valuables, bonds etc., are taken. While taking physical possession of securities the bank becomes bailee and the customer bailor. Banks also keeps articles, valuables, securities etc., of its customers in Safe Custody and acts as a Bailee. As a bailee the bank is required to take care of the goods bailed.
3.Lessor and Lessee:
Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee, premium and rent. As per the section
“A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.”
Definition of Lessor, lessee, premium and rent :
(1)The transferor is called the lessor,
(2)The transferee is called the lessee,
(3)The price is called the premium, and
(4)The money, share, service or other thing to be so rendered is called the rent.”
Providing safe deposit lockers is as an ancillary service provided by banks to customers. While providing Safe Deposit Vault/locker facility to their customers bank enters into an agreement with the customer. The agreement is known as “Memorandum of letting” and attracts stamp duty.
The relationship between the bank and the customer is that of lessor and lessee. Banks lease (hire lockers to their customers) their immovable property to the customer and give them the right to enjoy such property during the specified period i.e. during the office/ banking hours and charge rentals. Bank has the right to break-open the locker in case the locker holder defaults in payment of rent. Banks do not assume any liability or responsibility in case of any damage to the contents kept in the locker. Banks do not insure the contents kept in the lockers by customers.
4. Agent and Principal:
Sec.182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called “the Principal”.
Thus an agent is a person, who acts for and on behalf of the principal and under the latter’s express or implied authority and the acts done within such authority are binding on his principal and, the principal is liable to the party for the acts of the agent.
Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills, insurance premium etc., on behalf of customers. . Banks also abides by the standing instructions given by its customers. In all such cases bank acts as an agent of its customer, and charges for theses services. As per Indian contract Act agent is entitled to charges. No charges are levied in collection of local cheques through clearing house. Charges are levied in only when the cheque is returned in the clearinghouse.
5. As a Custodian: A custodian is a person who acts as a caretaker of some thing. Banks take legal responsibility for a customer’s securities. While opening a dmat account bank becomes a custodian.
6. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their shoes. Guarantee is a contingent contract. As per sec 31,of Indian contract Act guarantee is a " contingent contract ". Contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is transactional relationship.
Termination of relationship between a banker and a customer:
The relationship between a bank and a customer ceases on:
(a) The death, insolvency, lunacy of the customer.
(b) The customer closing the account i.e. Voluntary termination
(c) Liquidation of the company
(d) The closing of the account by the bank after giving due notice.
(e) The completion of the contract or the specific transaction.
The relationship developed between a banker and customer involves some duties on the part of both.
Duties of a banker:
A 'Banker' has certain duties vis-à-vis his customer. These are:
(a)Duty to maintain secrecy/confidentiality of customers' accounts.
(b)Duty to honour cheques drawn by customers on their accounts and collect cheque,
bills on his behalf.
(c)Duty to pay bills etc., as per standing instructions of the customer.
(d)Duty to provide proper services.
(e)Duty to act as per the directions given by the customer. If directions are not
given the banker has to act according to how he is expected to act.
(f)Duty to submit periodical statements i.e. informing customers of the state of the
account
(g)Articles/items kept should not be released to a third party without due
authorization by the customer
Duty to maintain secrecy:
Banker has a duty to maintain secrecy of customers' accounts. Maintaining secrecy is not only a moral duty but bank is legally bound to keep the affairs of the customer secret. The principle behind this duty is that disclosure about the dealings of the customer to any unauthorized person may harm the reputation of customer and the bank may be held liable. The duty of maintaining secrecy does not cease with the closing of account or on the death of the account holder.
As per Sec. 13 of “Banking Companies Acquisition and Transfer of Undertakings Act 1970”-
“Every corresponding new bank shall observe, except as otherwise required by law, the practices and usages customary among bankers, and, in particular, it shall not divulge any information relating to or to the affairs of its constituents except in circumstances in which it is, in accordance with law or practices and usages customary among bankers, necessary or appropriate for the corresponding new bank to divulge such information.”
Maintaining secrecy is implied terms of the contract with the customer which bank enters into with the customer at the time of opening an account.
Bank has not only to maintain secrecy of transactions, but secrecy is also to be maintained in respect of operations through ATM/ debit cards. Bank has also to maintain secrecy of user ID pins with due care so that it does fall in wrong hands.
Failure to maintain secrecy:
Bank is liable to pay damages to the account holder for loss of money and reputation if it fails in its duty to maintain secrecy and discloses information relating to a customer's account or conduct of the account to any unauthorized person.
Bank can also be liable to the third party if its wrongful disclosure harms the interest of the third-party. If bank Knowingly furnishes wrong information
There has been a misrepresentation
Over estimation of favourable opinion
Circumstances under which banker can disclose information of customer's account:
A bank can disclose information regarding customer's account to a person(s) under the following circumstances.
(a)Under compulsion of law.
(b)Under banking practices.
(c)For protecting national interest.
(d)For protecting bank’s own interest
(e)Under express or implied consent of the customer
Disclosure under compulsion of law:
Banks disclose information to various authorities who by virtue of powers vested in them under provisions of various acts require banks to furnish information about customer’s account. The information is called under:
(i)Section 4 of Banker's Book Evidence Act, 1891
(ii)Section 94 (3) of Code of Civil Procedure Act, 1908
(iii)Section 45 (B) of Reserve Bank of India Act, 1934
(iv)Section 26 of Banking Regulation Act, 1949
(v)Section 36 of Gift Tax Act, 1958
(vi)Sections 131, 133 of Income Tax Act, 1961
(vii)Section 29 of Industrial Development Bank of India Act, 1964
(viii)Section 12of Foreign Exchange Management Act, (FEMA) 1999
(ix)Section 12 of the Prevention of Money Laundering Act, 2002
Banks are required to furnish only the called for information (no additional information is to be furnished) on receipt of written request of the person who is vested with the authority to call for such information under the said acts. The customer is kept informed about the disclosure of the information.
Disclosure under banking practices:
In order to ascertain financial position and credit worthiness of the person banks obtain information from other banks with which they are maintaining accounts. It is an established practice among bankers and implied consent of the customer is presumed to exist. The opinion is given in strictest confidence and without responsibility on the part of the bank furnishing such information. Credit information is furnished in coded terms to other banks on IBA format and without signatures.
2.Duty to provide proper accounts :
Banks are under duty bound to provide proper accounts to the customer of all the transactions done by him. Bank is required to submit a statement of accounts / passbook to the customer containing all the credits and debits in the account.
3.Duty to honour cheques:
As 'banking' means accepting of deposits withdrawable by cheque, draft, order or otherwise, the banker is duty bound to honour cheques issued by the customers on their accounts.
Sec. 31of Negotiable Instruments Act, 1881 specifies the liability of drawee of cheque. As per Sec. 31 “The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in. default of such payment, must compensate the drawer for any loss or damage caused by such default.”
Therefore it is the duty of a bank to honour the cheques issued by the account holder if:
The cheque has been properly drawn and is in order in all respects i.e. it is properly dated, amount in words and figures have been expressed properly, is neither stale nor post dated nor mutilated and the signature of accountholder tallies with the specimen recorded with the bank. The cheque should be drawn on the branch where the account is maintained. (Due to implementation of technology and core banking solution a customer can present cheques on any branch of a bank. RBI has advised banks to issue multi city cheques to account holders.)
(a)There is sufficient balance in the account and the balance is properly
applicable for payment of the cheque.
(b)The cheque is presented for payment on a working day and during the business
hours of the branch.
(c)Endorsements on the cheque are regular and proper.
(d)The payment of the cheque is not countermanded by the drawer
Duty to honour cheques ceases on receipt of:
(a)Stop payment instructions from the account holder.
(b)Notice about the death of the drawer.
(c)A garnishee order attaching the balance in the account or an income-tax
attachment order received by the banker.
(d)Drawer of the cheque becoming insolvent and/or a lunatic at the time of drawing
the cheque.
Bank can refuse to honour the cheques if:There is in sufficient 1balance in the account to make payment of the cheque.
Cheque issued does not pertain to the account on which it has been drawn.
1.If the cheque is not in order (post dated, stale, payment countermanded, amount in
words and figure differs, etc.)
2.The balances held in account are earmarked for some specific purpose and the
remaining balance is not sufficient to honour the cheque.
Rights of a banker:
It is not that the bank has only duties to wards its customers, it too has certain rights vis-à-vis his customers. The rights can broadly be classified as:
Right of General Lien
a)Right of Set-Off
b)Right of Appropriation
c)Act as per the mandate of customer
d)Right to Charge Interest, Commission, Incidental Charges etc.
Lien:
A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor. The creditor (bank) has the right to maintain the security of the debtor but not to sell it. There are two types of lien viz.
1.Particular Lien and
2.Right of General Lien
(a) Particular Lien:
A 'particular lien' gives the right to retain possession only of those goods in respect of which the dues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular security for a particular debt, then the banker's right gets converted into a particular lien.
(b) Right of General Lien:
Banker has a right of general lien against his borrower. General lien confers banks right in respect of all dues and not for a particular due. It is a statutory right of the bank and is available even in absence of an agreement but it does not confer the right to pledge. A 'general lien' gives the right to retain possession of any goods in the legal possession of the creditor until the whole of the debt due from the debtor is paid.
Section 171 of Indian Contract Act, 1872 confers the right of general lien to banks. As per the section “ Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain, as a security for a general balance of account any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to the effect.”
Bank has a right of lien only when goods, securities are received in the capacity as a creditor. While granting advances banks take documents. These documents confer right to convert general lien as an implied pledge. A banker’s lien is more than a general lien, it is an implied pledge and he has the right to sell the goods in case of default Bank has a 'Right of Sale' of goods under lien. Banker's right of lien is not barred by the Law of Limitation.
Exercising Right of Lien:
Bank has the right of lien on goods and securities entrusted to him legally and standing in the name of the borrower.
Bank can exercise right of lien on the securities in its possession for the dues of the same borrower, even after the loan taken against that particular security has been re-paid.
Right of lien can be exercised on bills, cheques, promissory notes, share certificates, bonds, debentures etc.
Where right of lien cannot be exercised:
Bank cannot exercise right of lien on goods received for safe custody, goods held in capacity as a trustee, or as an agent of the customer, SDV, or left in bank by mistake
Right of set-off:
The banker has the right to set off the accounts of its customer. It is a statutory right available to a bank, to set off a debt owned to him by a creditor from the credit balances held in other accounts of the borrower. The right of set-off can be exercised only if there is no agreement express or implied to the contrary. This right is applicable in respect of dues that are due, are becoming due i.e. certain and not contingent. It is not applicable on future debts. It is applicable in respect of deposits that are due for payment.
The right of set off enables bank to combine all kinds of credit and debit balances of a customer for arriving at a net sum due.
The right is also available for deposits kept in other branches of the same bank. The right can be exercised after death, insolvency, and dissolution of a company, after receipt of a garnishee/ attachment order .The right is also available for time barred debts.
Deposits held in the name of a guarantor cannot be set off to the debit balance in borrowers account until a demand is made to the guarantor and his liability becomes certain. Banks cannot set off the credit balance of customer's personal account for a joint loan account of the customer with another person unless both the joint accountholders are jointly and severally liable. Banks exercise the Right of set off only after serving a notice on the customer informing him that the bank is going to exercise the right of set-off.
Automatic right of set off:
Depending on the situation, sometimes the set off takes place automatically without the permission from the customer. In the following events the set off happens automatically i.e. without the permission from the customer.
a)On the death of the customer,
b)On customer becoming insolvent.
c)On receipt of a Garnishee order on customer’s account by court.
d)On receipt of a notice of assignment of credit balance by the customer to the
banker.
e)On receipt of notice of second charge on the securities already charged to the
bank.
Conditions while exercising right of Set - Off:
a)The account should be in the sole name of the customer.
b)The amount of debts must be certain and measurable.
c)There should not be any agreement to the contrary
d)Funds should not be held in trust accounts
e)The right cannot be exercised in respect of future or contingent debts.
f)The banker has the right to exercise this right before a garnishee order is received by it.
Right of Appropriation:
It is the right of the customers to direct his banker against which debt (when more than one debt is outstanding) the payment made by him should be appropriated. In case no such direction is given, the bank can exercise its right of appropriation and apply it in payment of any debt. Section 59,60 and 61 of Indian Contract Act, 1872 lays down the rules of appropriation.
Sec.59.Application of payment where debt to be discharged is indicated: (i.e.– As per borrowers instructions)
Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly.
Sec.60. Application of payment where debt to be discharged is not indicated: (i.e. in the absence of express or implied intention of debtor)
Sec.60 of the Indian Contract Act states that if the debtor does not intimate or there is no circumstance of indicating how the payment is to be used, the right of appropriation is vested in the creditor.
According to the Act, “Where the debtor has omitted to intimate and there are no other circumstances, indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.”
Sec.61.Application of payment where neither party appropriates.
Where neither party makes any appropriation the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionally.
Unless there is an agreement to the contrary, any payment made by a debtor is applied first towards interest and thereafter towards principal. If a customer has only one account and he deposits and withdraws money from it regularly, the order in which the credit entry will set off the debit entry is in the chronological order, this is known as Clayton’s rule.
Rule in Clayton’s case:
The rule was laid down in famous Devayanas Vs. Noble. The rule applies to running accounts like CC/ OD with debit balance. The rule states that each withdrawal in a debit account is considered as a new loan and each deposit as a repayment in that chronological order.
Banker's right to charge interest, commission, incidental charges etc. :
Banker has an implied right to charge for services rendered and sold to a customer. Bank charges interest on amount advanced, processing charges for the advance, charges for non-utilization of credit facilities sanctioned, charges commission, exchange, incidental charges etc. depending on the terms and conditions of advance banks charge interest at monthly, quarterly or semiannually or annually. Banks charge customers if the balance in deposit account falls below the prescribed amount. Usually the bank informs such charges to the customer by various means.
Nomination Facility:
Nomination is expression of wish of a person about transfer of his assets after his death to a named person. Nomination is not a will but it serves the purpose of will. In terms of Sections 45ZA to 45 ZF of the Banking Regulation Act, 1949, Banking Companies (Nomination) Rules, 1985 have been framed. Nomination facility simplifies the procedure for settlement of claims of deceased depositors and locker holders. In an unfortunate event of the death of a depositor, nomination enables the bank to make payment to the nominee of a deceased depositor, of the amount standing to the credit of the depositor, return the articles left by a deceased person in the bank's safe custody to the nominee without asking for succession certificate or verifying claims of legal heirs.
Nomination does not take away the rights of legal heirs on the estate of the deceased. The nominee receives the money from the bank as a trustee of the legal heirs. In the case of a joint deposit account the nominee's right arises only after the death of all the depositors. Nomination facility is intended for individuals and sole proprietary concerns.
Where the nominee is a minor, the depositor making the nomination appoints any person to receive the amount of deposit in the event of his death during the minority of the nominee. A person legally empowered to operate a minor's account can file a nomination on behalf of the minor.
Nomination can be made in account opening form itself or on a separate form indicating the name and address of the nominee. The account holders can change the nomination any time. There can be only one Nominee for a deposit account whether held singly or jointly. There can be two nominees for a jointly held locker.
Availability of the Nomination facility:
Nomination facility is available for all types of bank deposits, safe deposit lockers, and safe custody articles. This is also applicable to deposits having operating instructions "Either or Survivor".
Nomination can be made in favour of one person only.
In case of a joint account, nomination is to be made by all depositors jointly.
Nomination cannot be made in accounts where deposits are held in a representative capacity e.g. trust accounts etc. and in accounts of partnership firms, H.U.F., companies, associations, clubs etc.
Nomination can be made in favour of a minor. However while making the nomination, the nominee has to appoint another person (not a minor), to receive the amount of the deposit on behalf of the nominee in the event of the death of the depositor during the minority of the nominee. Date of birth of minor be obtained and noted.
A nomination will continue to be in force even on renewal of term deposit, unless specifically cancelled or changed.
Banks obtain separate nomination form for each term deposit receipt
A non-resident can be nominated as a nominee in a resident account
In case of non-resident nominees, the amount entitled to him from the account(s)/ deposits(s) of a deceased person, will be credited to his NRO account. The amount so credited cannot be remitted outside India.
Insurance of Bank Deposits:
The Deposit Insurance and Credit Guarantee Corporation of India, a public limited company promoted by Reserve Bank of India, insure bank deposits. The authorised capital of the Corporation is Rs.50 crore, which is fully issued and subscribed by the Reserve Bank of India (RBI). The management of the Corporation vests in a Board of Directors of which a Deputy Governor, Reserve bank of India, is the Chairman.
The Corporation protects the interest of depositors and infuses confidence by providing deposit insurance on account of failure of banks. All commercial banks including the branches of foreign banks functioning in India, local area banks, regional rural banks, all eligible co-operative banks are covered under the Deposit Insurance Scheme. The insurance covers the loss of all or part of their deposits in all branches of a bank to a maximum of Rs.1, 00,000. It insures all deposits such as savings, fixed, current, recurring, etc except the following types of deposits.
(i) Deposits of foreign Governments,
(ii) Deposits of Central/State Governments,
(iii) Inter-bank deposits,
(iv) Deposits of the State Land Development Banks with the State co-operative bank;
(v) any amount due on account of and deposit received outside India
(vi) any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.
The Corporation charges insurance premium from banks on deposits @10 paisa per Rs.100of assessable deposits per annum. The premium is charged twice a year on the assessable deposits as at 31st March and 30th September. Though the premium is charged on the full amount of deposit kept by depositors in a bank is insured up to a maximum of Rs.1,00,000 (Rupees One Lakh) only for both principal and interest amount.
The corporation pays to each depositor through the liquidator, the amount of his deposit up to Rupees one lakh within two months from the date of receipt of claim list from the liquidator. If a bank is reconstructed or amalgamated / merged with another bank, it pays the bank concerned, the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and the amount received by him under the reconstruction / amalgamation scheme within two months from the date of receipt of claim list from the transferee bank / Chief Executive Officer of the insured bank/transferee bank as the case may be.
In the second report of Narasimham Committee (April 1998) on “Banking Sector Reforms” recommendations have been made for reforming scheme of Deposit insurance. The committee has recommended that instead of “flat’” rate premium, it should be ‘ risk based’ or ‘variable rate’ premium.
Know Your Customer Norms and Cash transactions:
The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures enable banks to know/understand their customers and their financial dealings better, which in turn help them, manage their risks prudently. Necessary checks before opening a new account ensures that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations etc. and that no account is opened in anonymous or fictitious/ benami name(s).
Banks are supposed to adopt due diligence and appropriate KYC norms at the time of opening of accounts. The objectives of the KYC are to ensure appropriate customer identification and to monitor transactions of a suspicious nature. While opening an account a bank is supposed to obtain all information necessary for establishing the identity/legal existence of each new customer by taking and verifying the introductory reference from an existing account holder/a person known to the bank or on the basis of documents provided by the customer. The means of establishing identity can be passport, driving license etc. In respect of existing customers banks are required to complete customer identification at the earliest.
Ceiling and monitoring of cash transactions
As per RBI guidelines issued under Section 35 (A) of the Banking Regulation Act, 1949:
(i)Banks are required to issue travellers cheques, demand drafts, mail transfers, and telegraphic transfers for Rs.50, 000 and above only by debit to customers’ accounts or against cheques and not against cash. While purchasing travellers cheques, demand drafts, mail transfers, and telegraphic transfers for Rs.50, 000 and above purchaser has to mention his Permanent Income Tax Account Number (PAN) on the application.
(ii) The banks are required to keep a close watch of cash withdrawals and deposits for Rs.10 lakhs and above in deposit, cash credit or overdraft accounts and keep record of details of these large cash transactions in a separate register. Branches of banks are required to report all cash deposits and withdrawals of Rs.10 lakhs and above as well as transactions of suspicious nature with full details in fortnightly statements to their controlling offices.
Bankers’ Fair Practice Code:
Indian Banks’ Association has prepared a code, which sets standards of fair banking practices. This document is a broad framework under which the rights of common depositors are recognized. It is a voluntary Code that promotes competition and encourages market forces to achieve higher operating standards for the benefit of customers. The Code applies to current, savings and all other deposit accounts, collection and remittance services offered by the banks, loans and overdrafts, foreign-exchange services, card products and third party products offered by banks.
Money-laundering:
The concept of Money Laundering can be traced back to the "Hawala" transactions. Hawala mechanism facilitates the conversion of black money to white. Money laundering has become the centre of focus for criminals and governments alike.
As per sec.3 of Prevention of Money Laundering Act, 2002(PMLAct) money laundering has been defined as an offence. The main objective of this Act is to prevent, combat and control money laundering in India, and to confiscate, seize the property obtained from the laundered money. Money laundering is defined as the conversion of illegally acquired currency i.e. from drug trafficking, terrorist activity or other serious crimes as appearing to have been obtained from a legitimate source into legitimate funds. It is disguising of illegally obtained financial assets.
Sec.12 of the PMLAct requires every banking company, financial institution and intermediary to verify and maintain a record of all transactions of a prescribed value and to furnish information whenever sought within a prescribed time period. Under Section 35A of the Banking Regulation Act, 1949, Reserve Bank of India has issued guidelines to banking companies, financial institutions and intermediaries to maintain a record of all transactions. The RBI has said that every bank should set key indicators for accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors.
According to PML Act, 2002, whoever:
(a) Acquires, owns, possesses or transfer any proceeds of crime; or
(b) Knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly; or
(c) Conceals or aids in the concealment of the proceeds of crime,
Commits the offence of money laundering.
Friday, September 4, 2009
Monday, June 22, 2009
MUTUAL FUNDS
As per Mutual Funds Regualtion1996 issued by Securities and Exchange Board of India (SEBI), Mutual Funds means “a fund established in the form of a trust to raise monies through the sale of units to the public or a section of public under one or more schemes for investing in securities including money market investments.”
A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), before it can collect funds from the public. Mutual funds are governed by SEBI (Mutual funds) Regulations 1996 and amended from time to time. The regulations were amended in the year 2000 and 2006.
Unit Trust of India was the first Mutual fund, which was set up in year 1964 by an act of Parliament.
Setting a Mutual fund
A mutual fund is set up in the form of a trust. It is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. The trustees monitor the performance and ensure compliance of SEBI Regulations.
They are vested with the general power of superintendence and direction over Asset Management Company (AMC). Asset Management Company (AMC) registered with SEBI manages the fund by making investments in various types of securities.
Since, Mutual funds are setup as trusts, Indian Trust Act, 1882 applies on them. As they deal in securities, they are governed by the provisions of Securities Contract Regulation Act, 1956 and also by other tax laws.
Mutual Funds
An investor can invest in securities either in the primary market or secondary market. Investments in securities i.e. stocks, bonds, and other financial instruments requires expertise. It is not child’s game. Every investor is not an expert in the field. An investor needs to be in regular touch with the market for taking decision whether to hold the security or off load it or to buy or to reshuffle the portfolio. Mutual funds came into existence for helping the investors from all these botherations. Mutual funds are financial intermediary.
It is a mechanism for pooling the resources by issuing units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments.
Mutual funds are a form of collective investment scheme where funds from investors, are pooled and invested in diversified securities mentioned in the offer document, such as stocks, bonds, debentures, shares, money market instruments etc. It provides indirect investment opportunities to investors in accessing the capital market.
The fund manager trades in securities, books capital gains or loss, collects dividends or interest and then passes on to the investors periodically or at the end of specified period. The services are not provided free. The fund manager charges Management fee.
Mutual funds investment portfolio are continually adjusted under the supervision of professional manager, who after studying market trends, economic development and economic conditions, government policies and guidelines decides investments appropriate for the fund and choose those which according to him will closely match funds investment objectives. The fund manager trades in securities, books capital gains or loss, collects dividends or interest and then passes on to the investors periodically or at the end of specified period.
Difference between investing in a Mutual Fund and in an Initial Public Offering (IPO)
IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
What is portfolio?
Portfolio is group of physical and financial assets. However, the term is commonly used for financial assets i.e. securities like shares. Bonds, debentures etc. Since, there is an element of risk involved in financial assets it is said not to keep all eggs in one basket i.e. investments should be in diversified securities and in multiple institutions. This will reduce risk if not eliminate it. Investments done in the securities of various sectors and different institution are known as portfolio. People invest in more than one security for maximizing returns and reduce risk. Therefore, a portfolio manager does portfolio rebalancing. He lays more emphasis on sector, industry or theme rather than individual blue chips. The risk attached to an investment relates to uncertainty attached to investment returns and variability of the expected returns.
Classification of Mutual fund on the basis of scheme
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-Ended Fund / Scheme
An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous basis. An investor can invest at any time and withdraw any time as per his wishes. After the close of initial public offer, the units of the fund are quoted at a price. These Funds do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. The price is inclusive of Net Asset Value (NAV) and sales load if any. Sales load are the charges levied at the time of selling the units. Price paid while withdrawing the fund is equal to Net Asset Value less back –end load i.e. charges collected by the scheme at the time of buying back of the units from the unit holder. The key feature of open-end schemes is liquidity.
Close-Ended Fund / Scheme
A close-ended mutual fund can be purchased only at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. It has a stipulated maturity period e.g. 5-7 years. On maturity, the fund is redeemed and the corpus value is distributed to the unit holders. In case an investor wants to sell the units before the maturity period, he can sell it in the secondary market. Some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. These mutual funds schemes disclose NAV generally on weekly basis.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges.
Load Fund
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses.
Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. Loads affect yields/returns. Efficient Mutual funds may give higher returns in spite of loads.
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments.
No-Load Fund
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Classification according to Investment Objective
Prospectus of Mutual funds contains the investment objectives. On the basis of objectives schemes can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes. Such schemes may be classified mainly as follows:
1. Growth Funds
2. Income funds
3. Balanced Funds
4. Industry Specific Fund
5. Tax Saving funds
6. Guilt Fund
7. Money Market or Liquid Fund
8. Index Funds
9. Multi Fund
10. Assured Return Scheme
11. International funds
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. These funds normally invest a major part of their corpus in equities. For earning higher returns, the fund is kept invested for long duration in the stock market securities. The aim of growth funds is to provide capital appreciation over the medium to long- term.
Growth schemes are good for those investors who want to have appreciation over a long-term period of time. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors have to indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Such funds have comparatively high risks.
Income Funds / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. These funds invest in high dividend yielding securities. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. These funds are not affected because of fluctuations in equity markets. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors are not to bother about these fluctuations. The main objective is to generate current income. The risk in income fund is intermediate. Such funds are less risky compared to growth fund.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income. These fund hold a portfolio of diversified stocks (shares), bonds for realizing both capital gains and dividend and interest income. They invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity / growth funds. The risk in balanced fund is lower.
Industry Specific (sector specific) funds/schemes
These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, Power etc.
The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds.
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factor as is the case with income or debt oriented schemes.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges.
Multi Funds (Fund of Funds-FoF) scheme
These funds invest in the portfolio of other mutual funds. The scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
Assured Return scheme
Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.
International Funds
International funds invest in foreign securities.
Offer document
SEBI has prescribed minimum disclosures in the offer document. An abridged offer document gives useful information to the prospective investor. It contains features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.
Working
§ Mutual funds are required to despatch Unit certificates or statements of accounts within six weeks from the date of closure of the initial subscription of their schemes. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges.
§ In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.
§ Mutual funds are required to despatch to the unit holders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unit holder.
§ In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).
§ According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.
Primary Market
Primary market is the market for raising money. When a company issues shares, debentures, bonds etc by public offer, and when investors apply for these securities and he is allotted the securities, it is said that the security has been purchased from primary market. Primary market is the place for new issues either in the form of Initial Public Offer (IPO) or through right offer to the existing shareholders.
Secondary Market
Secondary market is the place for trading securities purchased in primary market. When the initial buyer who had purchased the Shares, bonds, debentures etc., from the primary market sells these securities, he sells them in the secondary market. Secondary market is the stock exchange, where trading in securities is done.
Net Asset Value
Mutual funds invest the money collected from the investors in securities markets .Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. The value of share (Unit) of mutual fund is known as Net Asset value (NAV),which is calculated periodically. Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day NAV is calculated each day.
In case of open-ended schemes its net asset value is disclosed on daily basis and in case of close-ended schemes it is disclosed on weekly basis. The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis, which are published in the newspapers. Some mutual funds send the portfolios to their unit holders.
Calculating Net Asset Value
Calculating mutual fund net asset values is easy. It is arrived after dividing total value of funds net assets by taking the closing market value of all securities held by the fund plus all other assets such as cash (minus any liabilities) by the number of shares outstanding. Suppose the net assets of a fund is Rs.60 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.60.00. The value of share (Unit) of mutual fund can be at a premium or discount to NAV.
Investing in Mutual funds has both advantages and disadvantages mentioned below.
Advantages
i) Diversification Benefits
Diversified investment improves the risk return profile of the portfolio. Since, resources have limitations, an investor cannot invest in diversified securities. Since, mutual funds get funds from investors, it is able to create substantially big pool of funds, which enables it to hold a large number of securities in diversified and multiple securities.
Diversification provides them with a lower level of risk than investing in a single stock or bond.
ii) Availability of Various Schemes
Mutual Funds offer a number of schemes to suit the requirements of the investor. An investor can choose between regular income schemes and growth schemes as per his requirement.
iii) Professional Management
Mutual funds are managed by professionals who have in depth knowledge of market, economy and trends in global market. This helps in better management of portfolio and in getting better returns.
Disadvantages of Mutual Funds
§ Investor has to rely on the judgment and decision of the Fund manager. He cannot choose the security in which he is interested. If the fund manager does not perform well, the investor is exposed to risk.
§ Charging of management fee by the fund manager reduces the return
§ It is not easy to liquidate
Role of SEBI
§ SEBI is the foremost authority for regulating mutual funds in India. It formulates policies and regulations to protect the interest of investors in securities and to promote the development of the securities market.
§ Registration of mutual funds is done after taking into account their financial soundness as well as the track record of Sponsors.
§ The offer documents of schemes launched by mutual funds and scheme particulars are vetted by SEBI.
§ It inspects and monitors the mutual funds every year in order to ensure their compliance with the regulations and to ensure that the funds collected in a particular scheme are invested as per the investment objectives mentioned in the offer document of Mutual Fund
§ Mutual funds are permitted to take up underwriting of primary issues as a part of their investment activity in order to diversify their business.
§ SEBI has prepared a CODE OF CONDUCT for Mutual funds. As per the code of conduct, the mutual funds should not use any unethical means to sell, market or induce any investor to buy their schemes. Further, they shall maintain high standards of integrity and fairness in all their dealings, render at all times high standards of service and exercise due diligence.
§ SEBI has laid down a code of advertisement for mutual funds. It has advised that the advertisement for Mutual Funds must contain following statement “Mutual Fund investments are subject to market risks, read the offer document carefully before investing”. And the above statement shall be displayed in black letters of at least 8inches height or covering 10% of the display area, on white background. The compliance officers shall ensure that the statement appearing in such advertisements are in legible font.
§ SEBI has issued guidelines about keeping its short tem funds with banks. Mutual funds cannot invest more than 10 per cent of the total net assets of a scheme in the short-term deposits of a single bank. It has also defined 'short term' for funds' investment purposes as a period not exceeding 91 days.
RBI is the monetary authority and the regulator of the banking system. Bank sponsored mutual funds are under the dual control of RBI and SEBI. Presently RBI is only the regulator of the Sponsors of bank-sponsored mutual funds. Bank sponsored Mutual funds are affected by the RBI stipulations on structure, issuance, pricing and trading of Government Securities SEBI is the regulator of all mutual funds.
Conclusion
People save money for meeting their future needs and exigencies. Savings is in fact sacrificing present needs for meeting future requirements. Every one wants to earn from the funds saved or from the extra funds. No one wants to keep the funds idle. Investors look for different investment avenues. Investing money in Mutual Funds is one of the several methods of investment. Resource mobilization by Mutual funds is on rise. Net resources mobilized by mutual funds were Rs.1, 53,802 crore during 2007-08. Net assets managed by mutual funds also increased to Rs.5, 05,152 crore during 2007-08.
Before taking investment decision the investor must go through the offer documents and risk factors.
“Mutual funds have two goals: to make money for themselves and for you, usually in that order.” Entry loads, exit loads, switching charges, annual recurring expenses, management fees, and investor servicing costs…these all add up over time.
A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), before it can collect funds from the public. Mutual funds are governed by SEBI (Mutual funds) Regulations 1996 and amended from time to time. The regulations were amended in the year 2000 and 2006.
Unit Trust of India was the first Mutual fund, which was set up in year 1964 by an act of Parliament.
Setting a Mutual fund
A mutual fund is set up in the form of a trust. It is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. The trustees monitor the performance and ensure compliance of SEBI Regulations.
They are vested with the general power of superintendence and direction over Asset Management Company (AMC). Asset Management Company (AMC) registered with SEBI manages the fund by making investments in various types of securities.
Since, Mutual funds are setup as trusts, Indian Trust Act, 1882 applies on them. As they deal in securities, they are governed by the provisions of Securities Contract Regulation Act, 1956 and also by other tax laws.
Mutual Funds
An investor can invest in securities either in the primary market or secondary market. Investments in securities i.e. stocks, bonds, and other financial instruments requires expertise. It is not child’s game. Every investor is not an expert in the field. An investor needs to be in regular touch with the market for taking decision whether to hold the security or off load it or to buy or to reshuffle the portfolio. Mutual funds came into existence for helping the investors from all these botherations. Mutual funds are financial intermediary.
It is a mechanism for pooling the resources by issuing units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments.
Mutual funds are a form of collective investment scheme where funds from investors, are pooled and invested in diversified securities mentioned in the offer document, such as stocks, bonds, debentures, shares, money market instruments etc. It provides indirect investment opportunities to investors in accessing the capital market.
The fund manager trades in securities, books capital gains or loss, collects dividends or interest and then passes on to the investors periodically or at the end of specified period. The services are not provided free. The fund manager charges Management fee.
Mutual funds investment portfolio are continually adjusted under the supervision of professional manager, who after studying market trends, economic development and economic conditions, government policies and guidelines decides investments appropriate for the fund and choose those which according to him will closely match funds investment objectives. The fund manager trades in securities, books capital gains or loss, collects dividends or interest and then passes on to the investors periodically or at the end of specified period.
Difference between investing in a Mutual Fund and in an Initial Public Offering (IPO)
IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.
What is portfolio?
Portfolio is group of physical and financial assets. However, the term is commonly used for financial assets i.e. securities like shares. Bonds, debentures etc. Since, there is an element of risk involved in financial assets it is said not to keep all eggs in one basket i.e. investments should be in diversified securities and in multiple institutions. This will reduce risk if not eliminate it. Investments done in the securities of various sectors and different institution are known as portfolio. People invest in more than one security for maximizing returns and reduce risk. Therefore, a portfolio manager does portfolio rebalancing. He lays more emphasis on sector, industry or theme rather than individual blue chips. The risk attached to an investment relates to uncertainty attached to investment returns and variability of the expected returns.
Classification of Mutual fund on the basis of scheme
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-Ended Fund / Scheme
An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous basis. An investor can invest at any time and withdraw any time as per his wishes. After the close of initial public offer, the units of the fund are quoted at a price. These Funds do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. The price is inclusive of Net Asset Value (NAV) and sales load if any. Sales load are the charges levied at the time of selling the units. Price paid while withdrawing the fund is equal to Net Asset Value less back –end load i.e. charges collected by the scheme at the time of buying back of the units from the unit holder. The key feature of open-end schemes is liquidity.
Close-Ended Fund / Scheme
A close-ended mutual fund can be purchased only at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. It has a stipulated maturity period e.g. 5-7 years. On maturity, the fund is redeemed and the corpus value is distributed to the unit holders. In case an investor wants to sell the units before the maturity period, he can sell it in the secondary market. Some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. These mutual funds schemes disclose NAV generally on weekly basis.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges.
Load Fund
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses.
Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. Loads affect yields/returns. Efficient Mutual funds may give higher returns in spite of loads.
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments.
No-Load Fund
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Classification according to Investment Objective
Prospectus of Mutual funds contains the investment objectives. On the basis of objectives schemes can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes. Such schemes may be classified mainly as follows:
1. Growth Funds
2. Income funds
3. Balanced Funds
4. Industry Specific Fund
5. Tax Saving funds
6. Guilt Fund
7. Money Market or Liquid Fund
8. Index Funds
9. Multi Fund
10. Assured Return Scheme
11. International funds
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. These funds normally invest a major part of their corpus in equities. For earning higher returns, the fund is kept invested for long duration in the stock market securities. The aim of growth funds is to provide capital appreciation over the medium to long- term.
Growth schemes are good for those investors who want to have appreciation over a long-term period of time. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors have to indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Such funds have comparatively high risks.
Income Funds / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. These funds invest in high dividend yielding securities. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. These funds are not affected because of fluctuations in equity markets. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors are not to bother about these fluctuations. The main objective is to generate current income. The risk in income fund is intermediate. Such funds are less risky compared to growth fund.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income. These fund hold a portfolio of diversified stocks (shares), bonds for realizing both capital gains and dividend and interest income. They invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity / growth funds. The risk in balanced fund is lower.
Industry Specific (sector specific) funds/schemes
These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, Power etc.
The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds.
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factor as is the case with income or debt oriented schemes.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges.
Multi Funds (Fund of Funds-FoF) scheme
These funds invest in the portfolio of other mutual funds. The scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
Assured Return scheme
Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.
International Funds
International funds invest in foreign securities.
Offer document
SEBI has prescribed minimum disclosures in the offer document. An abridged offer document gives useful information to the prospective investor. It contains features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.
Working
§ Mutual funds are required to despatch Unit certificates or statements of accounts within six weeks from the date of closure of the initial subscription of their schemes. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges.
§ In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.
§ Mutual funds are required to despatch to the unit holders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unit holder.
§ In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).
§ According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.
Primary Market
Primary market is the market for raising money. When a company issues shares, debentures, bonds etc by public offer, and when investors apply for these securities and he is allotted the securities, it is said that the security has been purchased from primary market. Primary market is the place for new issues either in the form of Initial Public Offer (IPO) or through right offer to the existing shareholders.
Secondary Market
Secondary market is the place for trading securities purchased in primary market. When the initial buyer who had purchased the Shares, bonds, debentures etc., from the primary market sells these securities, he sells them in the secondary market. Secondary market is the stock exchange, where trading in securities is done.
Net Asset Value
Mutual funds invest the money collected from the investors in securities markets .Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. The value of share (Unit) of mutual fund is known as Net Asset value (NAV),which is calculated periodically. Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day NAV is calculated each day.
In case of open-ended schemes its net asset value is disclosed on daily basis and in case of close-ended schemes it is disclosed on weekly basis. The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis, which are published in the newspapers. Some mutual funds send the portfolios to their unit holders.
Calculating Net Asset Value
Calculating mutual fund net asset values is easy. It is arrived after dividing total value of funds net assets by taking the closing market value of all securities held by the fund plus all other assets such as cash (minus any liabilities) by the number of shares outstanding. Suppose the net assets of a fund is Rs.60 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.60.00. The value of share (Unit) of mutual fund can be at a premium or discount to NAV.
Investing in Mutual funds has both advantages and disadvantages mentioned below.
Advantages
i) Diversification Benefits
Diversified investment improves the risk return profile of the portfolio. Since, resources have limitations, an investor cannot invest in diversified securities. Since, mutual funds get funds from investors, it is able to create substantially big pool of funds, which enables it to hold a large number of securities in diversified and multiple securities.
Diversification provides them with a lower level of risk than investing in a single stock or bond.
ii) Availability of Various Schemes
Mutual Funds offer a number of schemes to suit the requirements of the investor. An investor can choose between regular income schemes and growth schemes as per his requirement.
iii) Professional Management
Mutual funds are managed by professionals who have in depth knowledge of market, economy and trends in global market. This helps in better management of portfolio and in getting better returns.
Disadvantages of Mutual Funds
§ Investor has to rely on the judgment and decision of the Fund manager. He cannot choose the security in which he is interested. If the fund manager does not perform well, the investor is exposed to risk.
§ Charging of management fee by the fund manager reduces the return
§ It is not easy to liquidate
Role of SEBI
§ SEBI is the foremost authority for regulating mutual funds in India. It formulates policies and regulations to protect the interest of investors in securities and to promote the development of the securities market.
§ Registration of mutual funds is done after taking into account their financial soundness as well as the track record of Sponsors.
§ The offer documents of schemes launched by mutual funds and scheme particulars are vetted by SEBI.
§ It inspects and monitors the mutual funds every year in order to ensure their compliance with the regulations and to ensure that the funds collected in a particular scheme are invested as per the investment objectives mentioned in the offer document of Mutual Fund
§ Mutual funds are permitted to take up underwriting of primary issues as a part of their investment activity in order to diversify their business.
§ SEBI has prepared a CODE OF CONDUCT for Mutual funds. As per the code of conduct, the mutual funds should not use any unethical means to sell, market or induce any investor to buy their schemes. Further, they shall maintain high standards of integrity and fairness in all their dealings, render at all times high standards of service and exercise due diligence.
§ SEBI has laid down a code of advertisement for mutual funds. It has advised that the advertisement for Mutual Funds must contain following statement “Mutual Fund investments are subject to market risks, read the offer document carefully before investing”. And the above statement shall be displayed in black letters of at least 8inches height or covering 10% of the display area, on white background. The compliance officers shall ensure that the statement appearing in such advertisements are in legible font.
§ SEBI has issued guidelines about keeping its short tem funds with banks. Mutual funds cannot invest more than 10 per cent of the total net assets of a scheme in the short-term deposits of a single bank. It has also defined 'short term' for funds' investment purposes as a period not exceeding 91 days.
RBI is the monetary authority and the regulator of the banking system. Bank sponsored mutual funds are under the dual control of RBI and SEBI. Presently RBI is only the regulator of the Sponsors of bank-sponsored mutual funds. Bank sponsored Mutual funds are affected by the RBI stipulations on structure, issuance, pricing and trading of Government Securities SEBI is the regulator of all mutual funds.
Conclusion
People save money for meeting their future needs and exigencies. Savings is in fact sacrificing present needs for meeting future requirements. Every one wants to earn from the funds saved or from the extra funds. No one wants to keep the funds idle. Investors look for different investment avenues. Investing money in Mutual Funds is one of the several methods of investment. Resource mobilization by Mutual funds is on rise. Net resources mobilized by mutual funds were Rs.1, 53,802 crore during 2007-08. Net assets managed by mutual funds also increased to Rs.5, 05,152 crore during 2007-08.
Before taking investment decision the investor must go through the offer documents and risk factors.
“Mutual funds have two goals: to make money for themselves and for you, usually in that order.” Entry loads, exit loads, switching charges, annual recurring expenses, management fees, and investor servicing costs…these all add up over time.
Thursday, April 10, 2008
MOTIVATION
Introduction:
The word motivation comes from a Latin word ‘ MOVERE’-to move. That means motivation makes human being move or do things the way they do, or behave the way they behave. Different people use the term ‘Motivation’ in different ways. Some consider it an art of manipulating human behavior and some as psychological exploitation. When one fails to achieve the objective, or does not perform properly we use the word in a casual manner ‘just motivate him, ‘take care’ he will do the job. Some persons consider motivation a dose for rejuvenating and charging employees to perform. They consider that there will be instant and positive impact on the performance when one talks good or when one is given feel good feeling. We have to understand that multiple factors contribute in motivating an individual.
Motivation is not a simple concept. It is difficult to understand the urge behind behaviour. It is basically a psychological process. Since it is a process, we cannot see it. What we see is the behaviour.
In any organization leave aside machines; it is the human force, which does the job. Management is Managing men tactfully. The question is why to manage men? The reason is that we want them to perform. One of the oldest definitions of Management is to get the work done. For getting the work done we have not only to administer people but have also to manage them tactfully. To manage men tactfully, we must know the psychology of human behaviour.
According to Frank Tarkenton consultant and former PRO football Player “ People don’t change their behaviour unless it makes a difference for them to do so.”
Why do we work?
A person cannot remain ideal either he is working or his faculties are. Remaining ideal is not rewarding. Inactivity has no place in the society. Inactivity is not the part of activity. Work plays significant part in human development and fulfillment. Different people work for different reason. Most of us would say that we work in order to acquire the resources needed first for survival and then for enjoyment. People work to fulfill their needs and desires. Without desire no action springs up. When we want a person to perform, we need to arouse his desire for that act. And how we do it? We lure him, encourage him, force him and even threaten him. The whole purpose is to arouse his instinct to perform. We give him positive strokes; positive feedback to encourage and some times discard him. The whole purpose is to get out put and results. When one works willingly, he has more energy. Will brings energy. Motivated people work well, because the will to work is from within the person.
Needs:
People work to satisfy their needs. They take interest so long their needs are fulfilled. Needs are of various types, basic, social, security, recognition etc. They differ from person to person; hence behavour pattern varies with the individual. Needs are not static they change from time to time.
We do not know the source of need or desire but we see the action for fulfilling the desire.
Motive:
A motive is a felt need or desire. Behind every need there is a motive - a purpose. Motives are needs, which are directed towards a goal. It is a drive or impulse within an individual that goads him into action. All our actions, behaviour are governed by some motive. The needs or desire arise in mind. Hence it is the motive, which is most important. Motives cannot be seen. However, motivated behaviour can be observed. Motive directs or channelises behavior towards goals. Behaviour is goal oriented. It is series of activities depending on the motives. We make inferences about motives by observing behaviour. We cannot see pain, but can observe pain by behaviour of person.
The strength of motives depends on whether it is satisfied or not. Its strength decreases if it is either satisfied or blocked from satisfaction. An individual is not always consciously aware of every thing he wants; hence much of his behaviour is affected by subconscious motives of need. The configuration of one’s motives is complex. They change over time and are influenced by environmental conditions
Desire:
Mind consists of a succession of thought waves. From these mental waves arises desire. Desire is for what is not attained. Our thought and behaviour are governed by our desire. Behaviour is controlled by the motives or need and is predominantly self centered and selfish. The desire transforms itself into will and works through the gross instrument - the body. Motive makes mind to think and nature works. Needs and desires are primary forces determining the focus of our thoughts, feelings and behaviour and directing the way our mind works.
Desire is the very fabric of man’s mind, like the threads of a cloth. It is an emotion that disturbs the mind till it is fulfilled. Desires direct the flow of energy. It propels mind towards the object. The aim is gratification. Without desire activity is impossible. The more we act in a field, our desire in that field increases. Man works to accomplish the desire that is most strong with him. There is no action without desire. Impelled by desire, we engage in action. Desires are unlimited, endless and infinite but the power of fulfillment varies. Thus some one is more successful than others in life. Desires are inter-linked and increase in geometrical progression. The peculiarity of desire is that as soon as one is satisfied other crops up. However, its fulfillment is limited. Since desires are unlimited, the quest to work continues. Wants are multiplying all the time. In economic language desire is the need and greed. Human needs can be satisfied but not human greed. Our desires are constantly changing. What we would prize today we may reject tomorrow.
What is Motivation? :
The word Motivation is the blending of two words ‘Motive’ and ‘Action’. Hence motivation is motivated action. When an action is performed with some motive or purpose, we call it motivated action. Actions are the expressions of thoughts and disturbances in mind caused by desire. As our desire, so our thoughts, as our thought, so our action and behaviour. Motivation is that aspect which energizes a person to perform better. It is self-propelling zeal. When an individual has some motive he takes interest and tries to do the work better. Motivation is an inner desire to make effort. It is the mechanism inside the person and incentives externally that propels activity. It is a factor or force that helps to explain human behaviour. All motivation comes from emotion and feeling, not from intellect.
Every action comes because of its impulse. Higher motivation comes from a particular source. It is doing more than what one is suppose to.
People do what they want to do or otherwise motivated to do. They must be motivated or driven to it, either by themselves or through external stimulus.
Motivation at the work place:
While people join and work in an organization to satisfy their needs, the organization needs people to carry out their activities. Both are mutually interdependent. Motivation is to create an environment or condition on the job that a worker acting to attain personal goals acts in such a way that the work desired by the organization gets done. The factors, which stimulate an individual to direct his actions, behaviour, and mental states to achieve the goal / target, are known as Motivation.
Motivational behaviour is not only influenced by the personal characteristics of an individual but also by the various conditions prevalent in the organisation. Complex forces in an organization intensify the desire and willingness of a person to use his potentialities for achieving organizational objectives.
When we see a person doing his job vigorously with energy and arduously, we consider him to be highly motivated. There is a general feeling that a satisfied worker works hard and a dissatisfied worker hardly works. He shirks responsibilities. The psychology of motivation is an important field of knowledge. It has been difficult to explain why individuals show a positive attribute in a particular set of circumstances and negative attributes in different set of circumstances. It is a riddle to find out why some people have a desire and ambition to achieve a set goal in life, whereas other lacks it. Some can derive great satisfaction from jobs and others, for whatever reason cannot. Organisations cannot achieve goals unless employees’ behaviour is directed. The goals may be set either by an individual or by his superiors at the place of work.
Employees’performance depends on their ability and motivation. Ability depends on education, experience and training. Improving ability is a slow and long process, whereas, motivation can be improved quickly. The factors for motivation differ from person to person and over time their motivations might change. There is no common factor for it. Motivational factors can be Intrinsic or Extrinsic. Some persons are motivated by money, some by Incentives, some by recognition, some by feelings of achievement, some by the working conditions, some by power and position and some by rewards, punishment. Therefore, behind any action there is some cause, motive or purpose. It is combination of a person's desire and energy directed towards achieving a goal.
Process of Motivation:
Employee motivation depends both on Internal and External factors. Some of these factors are enumerated below-
Internal Factors External Factors
1.Motives 1.Managerial Process
2.Needs 2.Working Conditions
3.Goals 3.Policies
4.Aspirations 4. Promotional Opportunities
5.Wants 5.Organizational Goals
6.Values 6.Leadership Style
7.Morale 7.Communication
Theories of Motivation:
Different theories have been propounded for motivation. Theories of Maslow, Megreger, Herzberg are well known. These theories can be broadly classified into two categories Content Theories and Process Theories.
a- Content Theories:
Content theories suggest that each of us has certain needs and/or desires that have been internalized over many years. It suggests that we become motivated to meet our internalized needs. Two exponents of content theories are Maslow and Herzberg.
Maslow’s Theory:
According to Abraham Maslow it is the need, which is the starting point for motivation. Every individual has several needs. The needs differ from person to person. The behaviour of an individual at a particular moment usually depends on his strongest need. When despite continuous efforts of an individual his needs are not satisfied, he may substitute goals that may satisfy his needs. According to Maslow man’s needs are arranged in the hierarchy of less or great priority or potency. Unless the need at the lower level is satisfied, the higher order needs would not be operative. Once a need is satisfied, it no longer works as a motivator.
People at the lower levels in an organization are most concerned about achievement and success, whereas people occupying higher position in the hierarchy attach more importance to autonomy and self-actualization.
Maslow’s ‘Hierarchy of Needs’ emphasizes that once lower level needs, such as food, drink and shelter have been met, we’re motivated by higher level needs such as job security and a safe environment. Next, we seek out contact and friendship with fellow workers and fulfill the need to belong to a group. Once this need is satisfied, we strive for recognition, acknowledgement and rewards. As per Maslow the hierarchy of needs is as under, which people want to be fulfilled?
1. Physiological needs: These are the basic needs having highest strength. These needs are for sustaining life. They are for food, water, nutrients clothing, shelter etc. They continue to dominate until they are somewhat satisfied. So long these need dominant, all other needs become non-existent. A satisfied want no longer remains a want. Once the physiological needs are satisfied a new set of needs known as Safety needs emerge.
2. Safety Needs: These are basically the needs for self preservation and security for all kinds such as stability, dependency, protection, freedom from fear, anxiety chaos, need for legal protection and so on. This is the need for secure place to live where there is no fear of persecution, harassment. In a job it is the need for seniority, security, etc. Once the Physiological and Safety needs are fairly satisfied the needs for love, affection and belongings emerge.
3. Belongingness and love needs: It is a social need. It is the need to build relationships and feel part of a group. It is the need to belong and to be accepted by various groups. On satisfaction of this need a man feels confident, prestigious and powerful. It is the need to relate closely to others to have a friendly cooperative work group. On satisfaction of the need an individual wants to be more than just a member of the group. He wants recognition from others and thus emerges the esteem need.
4. Esteem Needs: All people in our society have a need for self-respect or self-esteem and for the esteem of others. These needs are of two types. Firstly the desire for strength for achievement, for mastery, competence confidence and freedom.
Secondly the desire for reputation, prestige, self-respect, status, fame, dignity, appreciation, recognition to feel good about oneself. Once an individual’s esteem needs are satisfied his focus shifts towards the need for self-actualization.
5.Self-Actualization needs: It is the desired need for growth. People work harder when they feel that their performance will show their standing on intelligence or leadership. It is a need to maximize one’s potential. It is achievement of things according to one’s self image. It is realizing of one’s potentialities .It is a desire to become what one is capable of becoming. Every individual has different motive in performing an activity.
It is the need to realize one’s full potential as a human being; to achieve that entire one is capable of. It is the highest achievement. The person works with one resolute determination, with a single pointed mind.
The higher nature of man includes the need for meaningful work, responsibility, being fair and just and doing what is worthwhile which he can do it well. Man’s nature is to seek actualization.
According to Maslow, our needs provide the motivational driving force that will influence our behaviour. His ideas suggested that dissatisfaction at work isn’t something intrinsic to the employee but may be attributed instead to poor job design, inappropriate managerial behaviour and/or structures and too few opportunities for job satisfaction.
Herzberg’s Theory:
Fredrick Herzberg developed the theory after analyzing extensive interview data. People were asked what things on their job made them unhappy or dissatisfied and what made them happy and satisfied. The results indicated that people were dissatisfied with their jobs when they were concerned about the environment in which they were working. These include factors like poor company policy, interpersonal relations, salary, security, achievement, advancement, recognition, responsibility, work itself and working conditions. People felt happy about their jobs, as the job itself was good.
The theory is also known as “ Two Factor Theory”. The theory indicates that people like to do those things, which they consider valuable. Human beings are influenced by two basic and quite different needs. Those needs, which not fulfilled cause dissatisfaction and those, which provide positive satisfaction upon fulfillment. An individual is not highly motivated as a result of receiving an increase in salary. By increase in his pay, he temporarily ceases to be dissatisfied about his pay. A person derives more motivation when a thing gives him a sense of achievement, more responsibilities, advancement or increase in the intrinsic interest in the work.
If these conditions are not present they do not result in dissatisfaction. Increase in efficiency acts as motivator and gives people greater scope to gain personal achievement, recognition challenge, responsibility and opportunity for individual growth and development.
Preventing or reducing dissatisfaction in the work situation is quite different from providing positive satisfaction. Motivation can be provided if motivators are used in the work situation.
Herzberg believed that people had higher and lower levels of needs. He divided these needs into following two categories:
1.Hygiene factor:
These factors are not intrinsic part of job and are not directly related to work. These are ‘environmental’ factors. These factors are related to the conditions under which a job is a performed. These factors do not increase the output of a worker however; they prevent dissatisfaction or losses in workers performance due to restrictions. These factors are mainly related to the environment at the place of work e.g. policies and administration, types of supervision, style of leadership, working conditions, inter-personal relationships security, type of work, working hours, status, job security salary etc.
Hygiene factors do not, in themselves, provide motivation but their presence reduces dissatisfaction and de-motivation.
2.Motivators:
These are the intrinsic job conditions, which motivate an individual in performing his job, and help an organisation in reducing dissatisfaction amongst workers. These are positive factors within a job role that allow for such things as achievement, responsibility, recognition, advancement and challenge. They contribute to the satisfaction of a worker, and his development while working in an organisation. They also give a feeling of achievement, professional growth, and recognition for accomplishment, challenging work etc.
Herzberg suggests that these factors are the ones that motivate individuals to perform to the best of their ability.
According to Herzberg both sets of factors are must for maximizing job satisfaction and for motivating the entire workforce. Employees will become dissatisfied If lower needs are not met. Even if steps are taken to reinforce lower level needs by the addition of more hygiene factors (such as wages or work hours), it is not necessary that the people would be motivated. A more effective way of encouraging a motivated workforce is to appeal to the higher level needs of an employee by assigning more responsibility or providing greater scope for advancement. In this way the individual’s goals are satisfied within the context of existing organizational goals.
As per Frederick Herzberg “ Management have always looked at man as an animal to be manipulated with a carrot and stick. They found that when a man hurts, he will move to avoid pain—and they say, ‘we are motivating the employees.’ Hell, you’re not motivating them, you’re moving them.”
Process Theories:
Process theories of motivation look at our thought processes. It explains the behavioral choices that are made which lead to actions intended to acquire reward. If one feels that his efforts will be appreciated, he may be more inclined to work harder towards a goal. The choice to assign efforts to a particular activity is decided on the expected reward. For example, if one is more productive than his co-workers in a similar role, and if this is recognized and rewarded then the level of motivation of that person will be the maximum.
Adam’s Equity Theory is one example of the process theory of motivation. Adam argues that people are motivated by ‘inequity’. We compare ourselves to others performing similar tasks and assess relative effort and reward. If one sees a co-worker is being rewarded similarly, in terms of rewards, salary, prestige and promotion, without putting more efforts and energy than himself, it acts as a negative motivator and the result is a dis-inclination to continue inputting effort and energy. However, if rewards commensurate with efforts, it results into a positive motivating factor. When one sees performers and non-performers are treated at par performers become demotivated.
Duglas MC Gregor’s Theory:
Douglas McGregor in his book “The Human Side of Enterprise”has examined theories on behaviour of individuals at work. According to him it is the management, which has to harness human energy to organisational requirement. Traditional and progressive organisations have different predisposition towards people. He formulated two models. Theories developed by him are known as “Theory X” and “Theory Y”.
Theory “X”:
Theory “X”relies mainly upon external control over human behavior. Traditional organisations have system of centralised decision-making and superior subordinate pyramid. It has assumptions about human nature and human motivation. The underlying assumption is that people must be made to do what is necessary for the success of enterprises. Its attention is directed to the techniques of direction and external control. It lays emphasis on the tactics of control procedures and techniques of telling people what to do, so as to determine whether they are to be rewarded or punished.
Assumptions of Theory ‘X’
Theory “X”is based on the following assumptions. It assumes that:
Average man is lazy by nature and inherently dislikes to work. He is self centered and indifferent to the organisational needs. He dislikes responsibility and prefers to be directed. He desires security above every thing. He is motivated only at the physiological and safety needs. He lacks ambition. He is gullible, not very bright has no or little creativity in solving or organisational problems. As the work is inherently distasteful to him he wants to work as little as possible or would avoid it if he can. Therefore, people must be closely watched and controlled and threatened, and then only they will work hard to achieve organisational goals. Therefore management must be tough and should have tight controls. Organisations, which accept theory ‘X’assumptions supervise and control their employees closely. They feel that external control is appropriate for dealing with unreliable, irresponsible and immature people.
A management can be soft, weak or hard in its approach with the employees. Workers take advantage of soft approach. They continually expect more but give less and less. On the other hand hard approach creates difficulties.
The assumptions of those following theory X are “wrong”. Man needs some deeper higher order motivation, the opportunity to fulfill himself, than financial rewards at work.
Those in control and in command do not give opportunities to the employees to prove their worth, but behave in unexpected fashion. Thus forces breed counter forces, which restricts output.
Workers are terrorized and management objectives are sabotaged. The best approach therefore could be neither hard nor soft but it should be transparent, firm and fair.
In view of increase in the level of education, standard of living democratic pattern of society, McGregor concluded that theory ‘X’ assumptions might fail to motivate many individuals to work towards organisational goals. He felt that management should understand human nature more accurately and developed an alternate theory of human behavior known as theory ‘Y’.
Theory ‘Y’
The theory relies heavily on self-control and self-direction. It assumes that by nature a worker is not lazy and unreliable. If properly motivated to work he can be creative and self-directed. Hence it is the responsibility of organisation to create an environment, which will encourage commitment to its objectives. It would also provide opportunity for initiative, ingenuity and self-direction in achieving organisational goals.
Assumptions of Theory ‘Y’:
Theory ”‘Y” is based on the assumption that Work is a natural phenomenon. In favorable conditions it is like play. By nature people are neither passive nor resistant to organisational needs. They have become so as a result of experience in the organisation. Self-control is often indispensable in achieving organisational goal. The capacities for achieving responsibility readiness to direct behavior towards organisatiional goals are present in people. If properly motivated, people can be self directed and creative at work. It is the responsibility of management to make it possible for people to recognize and develop their abilities. Motivation is the potential for development. It occurs at the social esteem and self-actualization levels as well as physiological and security levels.
Supporters of theory ‘Y’ help employees in gaining more experience and expertise. They assign more and more responsibilities to employees and have lesser external control over them. Employees are able to achieve the satisfaction of social esteem and self-actualization needs within this kind of environment.
What motivates?
The theories mentioned above energies and influence human behavior towards a certain direction/goal. Motivation is the key to individual success and organisational effectiveness. Under the conditions of modern industrial life, the intellectual potentialities of the average man are only partially utilized. Motivation differs from person to person, for some it is intellectual challenge, and for some an opportunity for creative activity or social contacts. The task itself may not be rewarding but its accomplishment may. Delegation of responsibility is conducive to motivation. People desire to seek recognition and approval, praise from others/superiors. This satisfies employee's ego. There are different reasons for a person in doing his work with interest.
1.When the work itself is intrinsically rewarding, it is an incentive to work hence motivating.
2.When the job is important, challenging, satisfying employees are motivated and committed to the organization.
3.When good interpersonal relationship exists.
4.Whencontrol and punishment are not the ways to make people work.
Finer points in motivation:
Management pays a heavy price for dissatisfying work, friction on the job, substandard output and quality, high turnover, absenteeism and tardiness etc. People differ in the expectations they bring to their jobs and the satisfaction they derive from job. While dealing with human being an organization has to keep in mind that
A job can be both satisfying and dissatisfying at the same time.
Motivation lies at the root of any person’s desire to excel in his or her work.
Motivated workers are the most productive worker.
The promise of money can make a man to work, but it cannot motivate him. Motivation means an inner desire to make an effort.
Routine tasks give evidence of extinguishing worker’s ambitions, initiative and purposive direction towards life goals.
If the work provides little satisfaction, employees seek their satisfaction else where in the job
Men often will not work at all and will rarely work well under other incentives if the social situation from their point of view is unsatisfactory.
" Blowing of Steam" would relieve many tensions and dissatisfaction.
Leadership and Employees Motivation:
The job of a manager is to get things done through employees. To do this he should be able to motivate them. Motivation in practice is different from what is in theory.
To understand motivation, human nature has to be understood. Which can be very simple, yet very complex too. An understanding and appreciation of this is a prerequisite to effective employee motivation in the workplace. Therefore qualitative leadership is must for effective management.
Researches indicate that beyond a certain point, a worker cannot find satisfaction by high monetary reward. Workers prefer
Job security
Working conditions
Advancement
Type of work
Company - proud to work for
Conclusion:
Late Bertrand Russell has expressed that mere knowledge does not have motivation within it: Motivation comes from a different source, namely, the field of emotions and sentiments in man. Something must stimulate knowledge ;otherwise it remains static and unable to influence human action. Our knowledge, said Russell that any two sides of a triangle are greater than the third side, does not motivate us while walking, that we should go by the short side and not by long side that motivation comes from some other inner source in man.
Motivation is inspiration .It is the joyous content of thrilled ecstasy of each immediate moment. An inspired work, and working in inspiration environment promises the greatest success.
The success of an organisation depends mainly on its work force unless the workers perform their duties properly and efficiently an organisation cannot grow. Every organisation desires best results from its employees and most employees want to do a good job. They want to do meaningful, challenging, exciting jobs and work, even if it is tiring and unpleasant. Therefore organisations have to make jobs challenging, exciting and meaningful. They have to understand the impact of various motivational and de-motivational factors. There is no common factor responsible for motivation or demotivation as it differs from person to person. A lack of motivation could be due to a number of problems viz., personal, family, financial, absence of corporate culture and policy, Style of management, attitudes of the manager, unfair treatment to people, improper reward and punishment system etc., To get maximum motivational mileage management has to be transparent and fair in its dealings. Motivation has to be institutionalized and not individualized.
People at the lower levels in an organization are most concerned about achievement and success, whereas people occupying higher position in the hierarchy attach more importance to autonomy and self-actualization.
Maslow’s ‘Hierarchy of Needs’ emphasizes that once lower level needs, such as food, drink and shelter have been met, we’re motivated by higher level needs such as job security and a safe environment. Next, we seek out contact and friendship with fellow workers and fulfill the need to belong to a group. Once this need is satisfied, we strive for recognition, acknowledgement and rewards. As per Maslow the hierarchy of needs is as under, which people want to be fulfilled?
1. Physiological needs: These are the basic needs having highest strength. These needs are for sustaining life. They are for food, water, nutrients clothing, shelter etc. They continue to dominate until they are somewhat satisfied. So long these need dominant, all other needs become non-existent. A satisfied want no longer remains a want. Once the physiological needs are satisfied a new set of needs known as Safety needs emerge.
2. Safety Needs: These are basically the needs for self preservation and security for all kinds such as stability, dependency, protection, freedom from fear, anxiety chaos, need for legal protection and so on. This is the need for secure place to live where there is no fear of persecution, harassment. In a job it is the need for seniority, security, etc. Once the Physiological and Safety needs are fairly satisfied the needs for love, affection and belongings emerge.
3. Belongingness and love needs: It is a social need. It is the need to build relationships and feel part of a group. It is the need to belong and to be accepted by various groups. On satisfaction of this need a man feels confident, prestigious and powerful. It is the need to relate closely to others to have a friendly cooperative work group. On satisfaction of the need an individual wants to be more than just a member of the group. He wants recognition from others and thus emerges the esteem need.
4. Esteem Needs: All people in our society have a need for self-respect or self-esteem and for the esteem of others. These needs are of two types. Firstly the desire for strength for achievement, for mastery, competence confidence and freedom.
Secondly the desire for reputation, prestige, self-respect, status, fame, dignity, appreciation, recognition to feel good about oneself. Once an individual’s esteem needs are satisfied his focus shifts towards the need for self-actualization.
5.Self-Actualization needs: It is the desired need for growth. People work harder when they feel that their performance will show their standing on intelligence or leadership. It is a need to maximize one’s potential. It is achievement of things according to one’s self image. It is realizing of one’s potentialities .It is a desire to become what one is capable of becoming. Every individual has different motive in performing an activity.
It is the need to realize one’s full potential as a human being; to achieve that entire one is capable of. It is the highest achievement. The person works with one resolute determination, with a single pointed mind.
The higher nature of man includes the need for meaningful work, responsibility, being fair and just and doing what is worthwhile which he can do it well. Man’s nature is to seek actualization.
According to Maslow, our needs provide the motivational driving force that will influence our behaviour. His ideas suggested that dissatisfaction at work isn’t something intrinsic to the employee but may be attributed instead to poor job design, inappropriate managerial behaviour and/or structures and too few opportunities for job satisfaction.
Herzberg’s Theory:
Fredrick Herzberg developed the theory after analyzing extensive interview data. People were asked what things on their job made them unhappy or dissatisfied and what made them happy and satisfied. The results indicated that people were dissatisfied with their jobs when they were concerned about the environment in which they were working. These include factors like poor company policy, interpersonal relations, salary, security, achievement, advancement, recognition, responsibility, work itself and working conditions. People felt happy about their jobs, as the job itself was good.
The theory is also known as “ Two Factor Theory”. The theory indicates that people like to do those things, which they consider valuable. Human beings are influenced by two basic and quite different needs. Those needs, which not fulfilled cause dissatisfaction and those, which provide positive satisfaction upon fulfillment. An individual is not highly motivated as a result of receiving an increase in salary. By increase in his pay, he temporarily ceases to be dissatisfied about his pay. A person derives more motivation when a thing gives him a sense of achievement, more responsibilities, advancement or increase in the intrinsic interest in the work.
If these conditions are not present they do not result in dissatisfaction. Increase in efficiency acts as motivator and gives people greater scope to gain personal achievement, recognition challenge, responsibility and opportunity for individual growth and development.
Preventing or reducing dissatisfaction in the work situation is quite different from providing positive satisfaction. Motivation can be provided if motivators are used in the work situation.
Herzberg believed that people had higher and lower levels of needs. He divided these needs into following two categories:
1.Hygiene factor:
These factors are not intrinsic part of job and are not directly related to work. These are ‘environmental’ factors. These factors are related to the conditions under which a job is a performed. These factors do not increase the output of a worker however; they prevent dissatisfaction or losses in workers performance due to restrictions. These factors are mainly related to the environment at the place of work e.g. policies and administration, types of supervision, style of leadership, working conditions, inter-personal relationships security, type of work, working hours, status, job security salary etc.
Hygiene factors do not, in themselves, provide motivation but their presence reduces dissatisfaction and de-motivation.
2.Motivators:
These are the intrinsic job conditions, which motivate an individual in performing his job, and help an organisation in reducing dissatisfaction amongst workers. These are positive factors within a job role that allow for such things as achievement, responsibility, recognition, advancement and challenge. They contribute to the satisfaction of a worker, and his development while working in an organisation. They also give a feeling of achievement, professional growth, and recognition for accomplishment, challenging work etc.
Herzberg suggests that these factors are the ones that motivate individuals to perform to the best of their ability.
According to Herzberg both sets of factors are must for maximizing job satisfaction and for motivating the entire workforce. Employees will become dissatisfied If lower needs are not met. Even if steps are taken to reinforce lower level needs by the addition of more hygiene factors (such as wages or work hours), it is not necessary that the people would be motivated. A more effective way of encouraging a motivated workforce is to appeal to the higher level needs of an employee by assigning more responsibility or providing greater scope for advancement. In this way the individual’s goals are satisfied within the context of existing organizational goals.
As per Frederick Herzberg “ Management have always looked at man as an animal to be manipulated with a carrot and stick. They found that when a man hurts, he will move to avoid pain—and they say, ‘we are motivating the employees.’ Hell, you’re not motivating them, you’re moving them.”
Process Theories:
Process theories of motivation look at our thought processes. It explains the behavioral choices that are made which lead to actions intended to acquire reward. If one feels that his efforts will be appreciated, he may be more inclined to work harder towards a goal. The choice to assign efforts to a particular activity is decided on the expected reward. For example, if one is more productive than his co-workers in a similar role, and if this is recognized and rewarded then the level of motivation of that person will be the maximum.
Adam’s Equity Theory is one example of the process theory of motivation. Adam argues that people are motivated by ‘inequity’. We compare ourselves to others performing similar tasks and assess relative effort and reward. If one sees a co-worker is being rewarded similarly, in terms of rewards, salary, prestige and promotion, without putting more efforts and energy than himself, it acts as a negative motivator and the result is a dis-inclination to continue inputting effort and energy. However, if rewards commensurate with efforts, it results into a positive motivating factor. When one sees performers and non-performers are treated at par performers become demotivated.
Duglas MC Gregor’s Theory:
Douglas McGregor in his book “The Human Side of Enterprise”has examined theories on behaviour of individuals at work. According to him it is the management, which has to harness human energy to organisational requirement. Traditional and progressive organisations have different predisposition towards people. He formulated two models. Theories developed by him are known as “Theory X” and “Theory Y”.
Theory “X”:
Theory “X”relies mainly upon external control over human behavior. Traditional organisations have system of centralised decision-making and superior subordinate pyramid. It has assumptions about human nature and human motivation. The underlying assumption is that people must be made to do what is necessary for the success of enterprises. Its attention is directed to the techniques of direction and external control. It lays emphasis on the tactics of control procedures and techniques of telling people what to do, so as to determine whether they are to be rewarded or punished.
Assumptions of Theory ‘X’
Theory “X”is based on the following assumptions. It assumes that:
Average man is lazy by nature and inherently dislikes to work. He is self centered and indifferent to the organisational needs. He dislikes responsibility and prefers to be directed. He desires security above every thing. He is motivated only at the physiological and safety needs. He lacks ambition. He is gullible, not very bright has no or little creativity in solving or organisational problems. As the work is inherently distasteful to him he wants to work as little as possible or would avoid it if he can. Therefore, people must be closely watched and controlled and threatened, and then only they will work hard to achieve organisational goals. Therefore management must be tough and should have tight controls. Organisations, which accept theory ‘X’assumptions supervise and control their employees closely. They feel that external control is appropriate for dealing with unreliable, irresponsible and immature people.
A management can be soft, weak or hard in its approach with the employees. Workers take advantage of soft approach. They continually expect more but give less and less. On the other hand hard approach creates difficulties.
The assumptions of those following theory X are “wrong”. Man needs some deeper higher order motivation, the opportunity to fulfill himself, than financial rewards at work.
Those in control and in command do not give opportunities to the employees to prove their worth, but behave in unexpected fashion. Thus forces breed counter forces, which restricts output.
Workers are terrorized and management objectives are sabotaged. The best approach therefore could be neither hard nor soft but it should be transparent, firm and fair.
In view of increase in the level of education, standard of living democratic pattern of society, McGregor concluded that theory ‘X’ assumptions might fail to motivate many individuals to work towards organisational goals. He felt that management should understand human nature more accurately and developed an alternate theory of human behavior known as theory ‘Y’.
Theory ‘Y’
The theory relies heavily on self-control and self-direction. It assumes that by nature a worker is not lazy and unreliable. If properly motivated to work he can be creative and self-directed. Hence it is the responsibility of organisation to create an environment, which will encourage commitment to its objectives. It would also provide opportunity for initiative, ingenuity and self-direction in achieving organisational goals.
Assumptions of Theory ‘Y’:
Theory ”‘Y” is based on the assumption that Work is a natural phenomenon. In favorable conditions it is like play. By nature people are neither passive nor resistant to organisational needs. They have become so as a result of experience in the organisation. Self-control is often indispensable in achieving organisational goal. The capacities for achieving responsibility readiness to direct behavior towards organisatiional goals are present in people. If properly motivated, people can be self directed and creative at work. It is the responsibility of management to make it possible for people to recognize and develop their abilities. Motivation is the potential for development. It occurs at the social esteem and self-actualization levels as well as physiological and security levels.
Supporters of theory ‘Y’ help employees in gaining more experience and expertise. They assign more and more responsibilities to employees and have lesser external control over them. Employees are able to achieve the satisfaction of social esteem and self-actualization needs within this kind of environment.
What motivates?
The theories mentioned above energies and influence human behavior towards a certain direction/goal. Motivation is the key to individual success and organisational effectiveness. Under the conditions of modern industrial life, the intellectual potentialities of the average man are only partially utilized. Motivation differs from person to person, for some it is intellectual challenge, and for some an opportunity for creative activity or social contacts. The task itself may not be rewarding but its accomplishment may. Delegation of responsibility is conducive to motivation. People desire to seek recognition and approval, praise from others/superiors. This satisfies employee's ego. There are different reasons for a person in doing his work with interest.
1.When the work itself is intrinsically rewarding, it is an incentive to work hence motivating.
2.When the job is important, challenging, satisfying employees are motivated and committed to the organization.
3.When good interpersonal relationship exists.
4.Whencontrol and punishment are not the ways to make people work.
Finer points in motivation:
Management pays a heavy price for dissatisfying work, friction on the job, substandard output and quality, high turnover, absenteeism and tardiness etc. People differ in the expectations they bring to their jobs and the satisfaction they derive from job. While dealing with human being an organization has to keep in mind that
A job can be both satisfying and dissatisfying at the same time.
Motivation lies at the root of any person’s desire to excel in his or her work.
Motivated workers are the most productive worker.
The promise of money can make a man to work, but it cannot motivate him. Motivation means an inner desire to make an effort.
Routine tasks give evidence of extinguishing worker’s ambitions, initiative and purposive direction towards life goals.
If the work provides little satisfaction, employees seek their satisfaction else where in the job
Men often will not work at all and will rarely work well under other incentives if the social situation from their point of view is unsatisfactory.
" Blowing of Steam" would relieve many tensions and dissatisfaction.
Leadership and Employees Motivation:
The job of a manager is to get things done through employees. To do this he should be able to motivate them. Motivation in practice is different from what is in theory.
To understand motivation, human nature has to be understood. Which can be very simple, yet very complex too. An understanding and appreciation of this is a prerequisite to effective employee motivation in the workplace. Therefore qualitative leadership is must for effective management.
Researches indicate that beyond a certain point, a worker cannot find satisfaction by high monetary reward. Workers prefer
Job security
Working conditions
Advancement
Type of work
Company - proud to work for
Conclusion:
Late Bertrand Russell has expressed that mere knowledge does not have motivation within it: Motivation comes from a different source, namely, the field of emotions and sentiments in man. Something must stimulate knowledge ;otherwise it remains static and unable to influence human action. Our knowledge, said Russell that any two sides of a triangle are greater than the third side, does not motivate us while walking, that we should go by the short side and not by long side that motivation comes from some other inner source in man.
Motivation is inspiration .It is the joyous content of thrilled ecstasy of each immediate moment. An inspired work, and working in inspiration environment promises the greatest success.
The success of an organisation depends mainly on its work force unless the workers perform their duties properly and efficiently an organisation cannot grow. Every organisation desires best results from its employees and most employees want to do a good job. They want to do meaningful, challenging, exciting jobs and work, even if it is tiring and unpleasant. Therefore organisations have to make jobs challenging, exciting and meaningful. They have to understand the impact of various motivational and de-motivational factors. There is no common factor responsible for motivation or demotivation as it differs from person to person. A lack of motivation could be due to a number of problems viz., personal, family, financial, absence of corporate culture and policy, Style of management, attitudes of the manager, unfair treatment to people, improper reward and punishment system etc., To get maximum motivational mileage management has to be transparent and fair in its dealings. Motivation has to be institutionalized and not individualized.
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