Understanding Financial Literacy and Customer Protection Situations of Nepalese Banks and Financial Institutions.

In today's globalized era, it is utmost important to understand the financial literacy environments of Nepalese banks and financial Institutions (BFIs).

Financial literacy makes the behavioral changes _ through better financial decision making. It is the understanding of various financial areas (like money, investments, personal finance) that helps to use their financial resources wisely. This helps an individual to know about his earnings, savings and investments.

Customer protection is the way through which the customers gets shield in relation to unfavorable situations. Financial literacy helps the customer to get protected.

As per the data provided by Nepal Rastra Bank, the number of branches of BFIs stood at 6,418 in mid-June 2018. These include 2,919 branches of commercial banks, 951 of development banks, 183 of finance companies and 2,365 of micro-finance institutions.

On an average, population served by per branch of BFIs stood at 4490 in mid-June 2018 compared to 5,809 a year ago. Of the total 753 local levels formed in the process of implementing federalism, commercial banks have shown their presence in 556 as of 8 July 2018. A research has also said that, more than 40 % of the people are out of the banking channel. This is due to lack of financial knowledge among the Nepalese people.

Poor financial literacy may lead to poor investment decisions, victim of higher interest rates, poor credit facilities, high opportunity costs and even bankruptcy.Therefore, financial customer protection and financial literacy has become the today’s necessity.

Nepal Rastra Bank has directed through its directive number 21 of its Unified Directive- 2075  to all its licensed banks and financial institutions to protect financial customer and enhance financial literacy.

Some of the arrangements that are made for Nepalese BFIs in relation to Financial Literacy and customer protection are as follows :

A ) Transparency related arrangements for Nepalese banks :

All the banking and financial institutions has to disclose all the necessary information regarding the nature of service provided, the charges charged under several names (fees, commission, brokerages, interest, fines, penalties), the procedures that is to be adopted and other kinds of conditions imposed for providing the services.

For this they generally do following activities:

a ) The banks and financial institutions makes necessary arrangements to their customers about
 -the services provided, types of accounts with different names offered, types of loans offered, financial services provided through electronic devices 
– through pamphlets, brouchers, diaries or through booklets to their customers.

b) The Nepalese banks clearly communicates the following details in precise, clear, free from ambiguity, topics orderly arranged and in simple language about following:

• Different types of accounts in operation (like saving account, fixed deposit account, current account, karmachari account, chuna muna account and so on).

• The details regarding fees charged to their customers for availing different types of services and facilities.

• The process to close the account.

• The methods of computing interest.

• The Advance payment fees.

• The actions to be taken on making default in payments of interest on time.

• Late fees charges

• Penalties fees

• The process of operating different types of electronic cards and their procedures.

• Details of possible banking offences and

• The details regarding the necessary safety measures that the customers has to comply .

c) All the Nepalese banks are required to send their details regarding different cost, interest related details as per the direction given by Nepal Rastra Bank, in specified format.

d) These details are also hosted on the website of the respective banks.

B ) Language related arrangements for Nepalese banks:

The BFIs are required to use easy and understandable language while providing financial services to its customer. The documents used for operating there clients are to be prepared as follows:


a) For Nepalese customer- in Nepalese language 

b) For Internal and International transaction purpose- in English languages

C ) Information related arrangements for Nepalese banks:

The BFIs are required to use easy, understandable and free from ambiguity
language while providing financial services to its customer.

D ) Simple banking related arrangements for Nepalese banks:

All the Nepalese banks has to make special, preferential and simplified arrangements regarding :

• Senior citizen

• Differently able citizen

They should be served through easily accessible counters and help whenever required while operation of banking transaction.

E ) Amended Fees related arrangements for Nepalese banks:

Any charges in contrary to the previous contracts is disclosed to the respective sections of customer. For the public interest, this changes in new structure of interest rates are also to be published in national daily newspaper (for nationally operated banks), regional/ district newspaper (for district operated banks ).

F ) Accounts related arrangements for Nepalese banks:

Nepalese banks are not allowed to take any charges in any name in providing following services:

• Opening deposits account

• Issuing cheques

• Operating accounts

• Closing accounts after 6 month of opening accounts.

• Providing the statements

• Providing loan to natural person up to Nepalese Rs.2, 00,000 through any branch banking services.

• When dormant accounts are made active.

However, they are free to charge fee, if any customer constantly demands the statements for same period more than once.

On issuing the card in Nepalese currency, No banks are allowed to charge any charge - for providing electronic cards except issue cost and renewal charges (on expiry of the card ).

G ) Cheques related arrangements for Nepalese banks:

For depositing the money on self-account through any kind of instruments like:

• Cheque

• Bills

• Pay order

- The banks has to deposit all the money mentioned in the aforesaid instruments in full in the account of customer. 

However, any commission that is to be charged for such services should be separately taken and separately accounted in the vouchers. 

H ) Interest related arrangements for Nepalese banks:

The difference between the two saving accounts of different names are not allowed to be more than 2%. While making any changes regarding the interest rates scheme of saving accounts, the bank must incorporate the changes in such a way that, all the saving accounts have proportionate impact by the degree of changes made.

The difference between the yearly penal provisions of lending fund as per agreement should not be more than 2%. However, while computing the yearly penal provision of lending fund, no banks are allowed to demand excess sum of money than its assured principal or interest for the amount due.

Interest on deposit will be provided even if the deposit account of customer is dormant.

The publication of interest rate is published as yearly interest rate.

I ) Service Fee related arrangements for Nepalese banks:

A ) Service fee related :

The cost of service charged by bank should not exceed the cost to the banks.

For example:

While getting the credit information of customer or Black listing the customer,

Then, the Fees charged by bank on removal from such black listed group- should not be more than the cost to the banks (i.e. fee charged by the credit information department).

Similarly, while providing ATM service, card services, charges for evaluating financial securities, insurance service charge and like, should not be charged more than its cost.

No charges is to be charged by any banks for clearance of cheque of less than Nepalese RS. 2, 00,000, through electronic mode.

b) Administrative fee and guarantee fee related:

Banks are allowed to charge administrative fee for passing loan. But, the administrative fee should be immediately reimbursed on refusal.

All fees are incorporated while computing the interest rate on loans - except administrative fees and guarantee fees.

For passing the loans under same categories, the deviations of administrative cost and guarantee cost should not exceed 0.25 %.

J ) Advance payment related arrangements for Nepalese banks:

• On providing loans the banks has to clearly state advance payment fees for loan transactions. Not to charge any kind of fees by the banks, if the loan holder wants to settle the debts in advance.

• If anyone wants to settle the loans and advances (up to Nepalese rupee 50 lakh or to the excess of its limit ) as an advance payment, due to the change in prior arrangements (related to interest or other agreements ), then, in such a case - no fee is to be charged by the bank. 

• If project loans and advances is taken by the debtor and the bank has changed the agreements (related to interest and other), without consulting the debtor, in such a case , if a debtor wants to settle the loans and advances as an advance payment - then no fee is to be charged by the bank.

K ) Grievance related arrangements for Nepalese banks:

All the Banks has to establish ‘Grievance Handling Desk’ and inform their customers for such facility in order to handle any uncomfortable and problems of their customers. Nepalese banks has established hotlines and online grievance handling portals for managing their customers.

L ) Financial Literacy related arrangements for Nepalese banks:

All the Nepalese banks are compulsorily required to incorporate financial literacy program in its strategic plan. They are required to provide financial information and financial inclusion programs for their customers.

M ) Confidentiality related arrangements for Nepalese banks:

All the banks has to keep the business related details (like, books of accounts, records, financial statements) of their customers secret except required by law.

Note:

Any bank and financial institution acting in contravention to the above is punished as per section 100 of Nepal Rastra bank Act, 2002. 

Road Map of Monetary Policy (2018/19 ) of Nepal

In this blog, 


I have made my sincere effort -to explain the overall monetary policy (2018/19) of Nepal in easy and organized way. 

The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.

Nepal RastraBank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy.  In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.

The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed. The budget has been announced for 2018/19 on 29 May 2018. The provincial governments has presented their revenue and expenditure estimates in their respective assemblies on 15 June 2018, following the provision of the Intergovernmental Fiscal Arrangement Act, 2017.

Therefore, in the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank has framed the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

Current Economic Scenario of Nepal:

• National macroeconomic indicators (such as economic growth and inflation) are in expected direction.

• The domestic economy is on a positive track. This is reflected by the encouraging economic growth of past 2 years.

• Increase in Imports is posing challenge to stability in external sector.

• The global economy is on a cyclical upswing.

• Prices of several international commodities are rising creating inflationary pressure.

• The monetary policy stances remain mixed at the global level.

• The balance of payments (BOP) is in deficit.

• Imports has exceeded Exports.

Economic Projections of Nepal: 

• Economic growth rate is to be maintained around 8 %.

• Consumer price inflation within 6.5 %.

• The maximum growth of broad money is set at 18 %.

• Domestic credit is projected to grow by 22.5 % and the private sector credit is projected to grow by maximum 20.0 %.

• Mobilization of resource to create employment promotion and entrepreneurial development.

• Maintain interest rate stability.

• Ensure easy access to financial services for all citizens by prioritizing financial inclusion and financial literacy. 

• Use of technology in payment system will be encouraged.

• Ensure adequate foreign exchange reserves to cover the prospective import of goods and services ( at least for 8 months).

• The demand for bank credit has increased since past 2 years. On the one hand, demand for credit has increased, while on the other, the balance of payments situation of the country is in deficit.

• There is a need to increase the loanable fund for attaining higher growth and promote rational allocation of resources for creating an inclusive economy.

• The interest rate on institutional deposits mobilized through auction has soared mainly due to slower growth of deposits relative to credit demand. As this has exerted high pressure on lending rate.

• Make necessary amendments in Nepal Rastra Bank Act, 2002 and Bank and Financial Institution Act, 2017 will be initiated.

• Make necessary policies related to regulation, inspection and supervision for the establishment and operation of infrastructure banks.

• Make necessary arrangements for opening branches of the BFIs to make the banking services further simplified and accessible.

• Establishment of provincial office of all commercial banks in each province.

• The campaign for opening bank accounts of all Nepali citizens within a year will be implemented effectively in coordination with concerned institutions.

• Students at high school and university level will be encouraged to open bank accounts. This will be complemented by financial literacy campaigning.

• The process of establishing Real Time Gross Settlement (RTGS) system has already been initiated. Necessary steps will be taken to establish National Payment Switch/Gateway.

• Encourage merger and acquisition process.

• All commercial banks are required to arrange for institutional rating . Such a rating can be done from national or international credit rating agencies. In addition, commercial banks are required to use the credit rating of the borrower as a basis for credit disbursement and renewal for the loans exceeding Rs. 500 million.

• Development banks and finance companies will be required to prepare their financial statements as per the Nepal Financial Reporting Standard (NFRS). 

• Aggregate demand will increase. This will create inflationary pressure in the economy due to : a ) Increase in expenditure of local, state and federal governments in course of achieving the targeted growth rate. b ) Increase in petroleum prices in the international market. 

Management Policies :

The shift of economy from the current scenario to the above projections, are planned to achieve through following management techniques :

A ) Through Monetary Management Techniques :

• The central bank has been using open market operations (OMOs) as the main instrument of monetary management. OMOs will be conducted on the basis of liquidity in excess of minimum reserves to be kept by the BFIs.

• Use WAIBR (weighted average interbank rate) as the operating target of the interest rate corridor (IRC) system.

• Reduce IRC to 6.5%

• Raise two-week deposit collection rate to 3.5 %

• Trim IRC to minimize the fluctuations in the short-term market interest rate.

• The provision of taking two-week repo rate as the policy rate is unchanged i.e 5% to maintain short term stability in interest rate.

• Reduce cash reserve ratio (CRR) to 4 %.

• Lower the Base Rate.

• Reduce SLR to 10 %, 8% and 7% for A, B and C class of banks respectively.

• Fix bank rate for the purpose of lender of last resort (LOLR) facility to 7%.

• Not required to make a margin call, when the pledged value of shares as collateral for margin lending declines by less than 20 %.

• Allow BFIs to extend their margin lending against the collateral of shares upto 25 % of their core capital.

• Maintain refinance rates as follows :

a) General refinance rate to 4%, special refinance and export refinance to 1%. However, Under this provision, BFIs are allowed to charge a maximum 9 % interest rate on general refinance and 4.5 % on special as well as export refinance.

b) The special refinance is provided at 1 % to promote sick industries, cottage and small industries, small businesses run by dalits, indigenous people, differently-abled individuals and deprived communities. Likewise, the export refinance aimed at encouraging exports is also kept unchanged at the existing rate of LIBOR plus 0.25 % .

B ) Through Credit Management Techniques:

• Allow BFIs (including in Indian currency) including Microfinance institutions to mobilize external borrowing up to 25 % of their core capital.

• Commercial banks to mobilize external loans in convertible foreign currencies up to 25 % of their core capital.

• Make provision for providing hedging facility for the foreign investment in infrastructure projects, pooling the investment amount in a separate fund. The fund will help to manage the foreign exchange risk to be borne by foreign investors. This facility is expected to attract foreign investment in large hydropower projects, transmission lines, roads and other infrastructure projects. A separate provision will be made in this regard.

• The ceiling of personal overdraft loan and revolving type loans extended by the BFIs will be reduced to Rs. 5.0 million. Additional policy provision will be introduced to control personal as well as overall overdraft lending of the BFIs.

• For commercial banks - Atleast 25 % of their total credit must be kept aside for priority sector lending of funds, whereby it must include at least 10 %  in agriculture sector and at least 15 % to energy and tourism sector. 
• However, for the development banks and finance companies -  at least 15 percent and 10 percent respectively of their total credit to priority sector is to be kept aside.

• Commercial banks will be encouraged to extend credit in the priority sectors in all 7 provinces.

• BFIs will be encouraged to provide credit to small and medium enterprises (SMEs).

• The limit of the refinance fund, set up for disbursing concessional credit to the priority sectors, will be increased to Rs. 35 billion.

• Loan to get extended for purchasing public vehicles (operating from renewable energy) under the priority sector lending.

• Commercial banks, development banks and finance companies has been fixed to disburse minimum 5 % of their total credit to the deprived sector for all three types of institutions.

• Loan up to Rs. 1.5 million is extended to the projects that are run by women - against group guarantee, under deprived sector lending. For the development of women entrepreneurship, GoN has provisioned 6 % interest subsidy on such loans.

• Encourage investment in agriculture  by amending the Manual relating to Commercial Farming and Livestock Credit.

• Make institutional rating arrangements for all commercial banks from 2018/19. Such a rating can be done from national or international credit rating agencies by those commercial banks. 

• Use the credit rating of the borrower as a basis for credit disbursement and renewal for the loans exceeding Rs. 500 million. 

• Widen the scope of the deprived sector credit by providing :

a) Certificate based loan under the mortgage of educational certificates.

b) loan to deprived and marginalized sections of the society.

c) loan to students of target group for higher as well as technical and professional education.

d)loans to Dalit Communities (for operating businesses under group guarantee). 

-For this Goverment of Nepal has provisioned 5 % interest subsidy on such loans.

C ) Through Long-Term Interest Rate Management Techniques:

• Reduce the limit for BFIs to accept the fixed deposit up to 15 % of its total deposit liabilities from a single institution . The maximum limit for institutional deposits is kept at 45 % of total deposit liabilities.

• Mobilization of the auction-based institutional fixed deposit at maximum 1% points above of the published fixed tenure deposit rate.

• Encourage BFIs to mobilize financial resources through long-term bonds. Resources raised from bond issuance will be taken into account while computing credit to core capital cum deposit ratio.

• Commercial banks to maintain a spread rate of 4.5 % by mid-July 2019 and the spread rate will be reduced gradually. 

D) Through Foreign Exchange Management  Techniques:

• Extend the term of foreign currency loan up to 180 days to import industrial raw materials through commercial banks.

• Make L/C mandatory to carry out imports : a) from India – exceeding INR 50 million  b) from other countries - exceeding USD 40,000

• Provide Foreign exchange facility up to USD 1000 to travelers traveling abroad- based on travel document issued by the GoN for travelling abroad through the land route.

• Allow commercial banks to act as an agent for managing trilateral agreement, manage Escrow account and provide custodian services to foreign investors making a loan investment in various projects in Nepal. Allow commercial banks to act as an agent for recovery of loan and interest and auctioning of the collateral of defaulted borrowers.

• Allow foreign investors investing in specified industries and projects to borrow local currency against the collateral of their foreign currency deposits at Nepali commercial banks.

• Allow commercial banks to execute confirmation of the L/C for the correspondent banking and trade finance services against the collateral of the foreign currency deposits kept by these banks at domestic as well as foreign correspondent banks.

• A provision will be made whereby goods from third countries could be exported to countries other than Nepal as per international rules and norms through the letter of credit on the basis of the advance payments received from the importer abroad.

• Ease the supply of gold to bullion traders.

• Allow the commercial banks to import gold at any time or at once during the month based on quota for the month. 

CLASSIFICATION OF LOANS AND ADVANCES OF BANK AND FINANCIAL INSTITUTION OF NEPAL

Hi !


As all of you know, bank collects the funds from savers in the form of deposit and lends it to another in form of loans and advances.


In other words, it collects funds from surplus groups and lends it to the deficit groups. This helps to balance the entire financial economy.


In general, loans and advances may be categorized into :

• Secured Loans and Advances 

• Unsecured Loans and Advances 

• Demand (Short-Term ) Loans and Advances 

• Long Term Loans and Advances

• Subsidized Loans and Advances 

• Concessional (Soft ) Loans and Advances 

• Personal Loans and Advances 

• Commercial (Business) Loans and Advances 

Different Bank and Financial Institutions may have different kinds of loans and advance categories with different names. However, their scope will fall under above categories.

The central bank of Nepal has clearly directed its licensed Bank and Financial Institutions to classify its loans and advances on the basis of its time period. The expiry of the deadline of repayment of the principal as well as interest serves as a basis for categorizing the loans and advances.

Under unified directive number 2, issued as on bhadra 2075 of Nepal Rastra Bank, the entire loans and advances of all the Bank and Financial Institution of Nepal are to be classified under five categories. They are as follows:

1. Pass :

• It refers to such loans and advances that are not overdue. 

• It also includes all such loans and advances that are overdue by a period up to 3 month. 

• The minimum provision that should be made for this category is 1%.

• They are known as "Performing Loan". 

2. Watch List :

• It refers to such loans and advances that is in preview of 'Pass' category embarked with certain criteria. (for watch list conditions/criteria please read the tutorial note ).

• The minimum provision that should be made for this category is 5%. 

• They are also the part of "Performing Loan ". 

3. Sub-standard :

• It refers to loans and advances that has been overdue by a period of minimum 3 month and maximum up to 6 month. 

• The minimum provision that should be made for this category is 25%. 

• They are known as "Non-Performing Loan ". 

4. Doubtful :

• It refers to loans and advances that has been overdue by a period of minimum 6 month and maximum up to 1 year. 

• The minimum provision that should be made for this category is 50%.

• They are the part of "Non-Performing Loan ". 

5. Loss :

• It refers to loans and advances that has been overdue by a period more than 1 year. 

• The minimum provision that should be made for this category is 100%. 

• They are the part of "Non-Performing Loan ". 

Therefore, all the licensed Bank and Financial Institutions has to classify their entire loans and advances into above five categories and make specified provisions thereon. However, this information should be quarterly reported to the Central Bank under the prescribed format along with financial statements.

                                                     Tutorial Note:

Under following circumstances, the central bank has directed its licensed bank and financial institutions to keep their loans and advances under watch list category :

• loans and advances that is due for 1-3 month

• short term loans or loans against paid up capital, whose period is temporarily increased without renewal.

• The debtor who fall under non-performing loan category in any other bank and financial institutions.

• Even though the principal as well as interest is timely paid, the lending bank and financial institutions must consider following :

• Is the loan passed to such debtor who is constantly bearing loss for two years ?
• Do the firm, company or institution has negative net worth ?

                  If the answer to the above two question is positive then it must be kept under watch list category. 

                  However, in case of project based loan, the above criteria must be checked only after production process has begun.

• Consortium financing (loan amount equal to 1 arab or more ) that has not been converted into multi-Banking loans.

• when Nepal Rastra Bank monitors the debtor and finds out - that the cash flow or the project operation of the debtor is weak, then the central bank may direct such bank and financial institutions to keep such loans and advances in its watch list category.

OFFENCE AND PUNISHMENT DECLARED BY NEPAL RASTRA BANK

Hey !

As a central bank of Nepal, what does Nepal Rastra Bank do to deal with offenders?

If you are stuck with this...you are at the right place.

Nepal Rastra Bank has played a significant role in developing a secure, stable and healthy development of banking and financial system. The bank has consistently worked to enhance the public credibility towards the entire banking and financial system of the country.

Due to several reasons, the offenses are committed in order to penetrate the banking and financial system. So, it is duty of central bank to consistently inspect, monitor and supervise the entire commercial bank and financial institutions.

First of all, Nepal Rastra Bank finds out the nature of offense, degree of offense and the effect of offense. After assuring these level of offense, the central bank takes proper action in order to punish its licensed commercial banks and financial institutions.

Generally, any activities done in contravention to the Nepal Rastra Bank Act , 2002 are considered as offense. The offense related activity is mentioned under section 95 and punishment related provisions under section 96 of chapter 11 of Nepal Rastra Bank Act, 2002. 

I have explained these provisions in simplest manner.

Offense gets committed, when anyone does following activities without obeying the Nepal Rastra Bank Act, 2002 or its framed bye-laws, rules, circulars, directives, notices and policy :

• Accepting deposits 

• Providing loan 

• Issuing debentures 

• Issuing any other financial instruments. 

• Charges or pays interest against the policy of the central bank.

• Issue fake, fraudaulent, counterfeit currency, duplicate or copied currency (involved directly or indirectly ).

• Operates the business transaction without obtaining license.

• Any obstruction is made in clearing and settlement process .

Here by ‘anyone’ I mean that, either they can be natural person or artificial person (created by the law). 

If the offender is natural person then he has to bear the punishment. However, if the offender is artificial person then the concerned official will have to bear the punishment.

If any commercial bank or financial institutions has come across any knowledge that anyone has committed such offence then, such information should be transmitted to Nepal Rastra Bank or the Government of Nepal for necessary actions.

However, Nepal Rastra Bank has the power to punish such offender as follows:

Case i ) If the offended value of asset is Ascertainable :

Any of the following punishment, as the legal authority deems fit.

Punishment = 

Upto : 

• 3 x the value of assets actually offended OR, 

• 3 yr of imprisonment OR, 

• 3 x the value of assets actually offended + 3 yr of imprisonment 

Case ii ) If the offended value of asset is Unascertainable :

Any of the following punishment, as the legal authority deems fit.

Punishment = 

upto :

• Nepalese Rs. 1 Million OR,

• 3 yr of imprisonment OR, 

• Nepalese Rs. 1 Million + 3 yr of imprisonment 

( In accordance with the amendment made as on 14th November 2016 as per Nepal Rastra Bank (second Ammendment ) Act, 2016 )

Note:

• It is to be noted that any person who has been indirectly involved into such degree of offense, will be punished up to half of the original offender. 

• Reasonable opportunity is given to be heard to the offender before imposing any kind of punishment. 

BEHAVIOUR MODIFICATION (OB Mod )

As the environment is dynamic, so is the behaviour. Behaviour of every people keeps changing. Different situations leads to different kind of behaviour. Same people shows different kind of behaviour in individual, different in group and different in organization.

As per Kurt Levin, Behaviour is the function of person and environment around him.

Mathematically, B = f (P, E)

Here,

P (Person) consists of two factors:

• Biographical Factors (like : age, sex, education, abilities, marital status ) 

• Psychological Factors (like: personality, perception, attitudes, values and learning) 

Similarly,

E (environment) consists of Political, economic, Social, Cultural, Technological and Legal factors.

Since, both variables (person as well as environment) are dynamic so, any behavior is not permanent.

The theory of organizational behavior modification was basically derived from B.F. Skinner (American psychologist) Operant Conditioning Model. As per this theory, human behavior is the function of its consequences. In simple words, people learns to behave on the basis of the reinforcements (rewards) and punishments.

According to Moorhead and Griffin :
“Organizational behavior modification or OB Mod. Is the application of reinforcement theory to people in organizational settings. ”

According to S.P.Robbins :
“OB Mod. Is the application of reinforcement concepts to individuals in the work setting.”

Here, reinforcement means anything that the learner finds rewarding, increasing the intensity of response - that helps the behavior to repeat.

As per Moorhead and Griffin, the organizational Behavior modification consists of following steps:

1. Identify performance related behavioural events:

Under this step, managers needs to identify three kinds of activity. They are:

• Behavioural events 

• Performance and 

• Organizational consequences. 

2. Measure : baseline the frequency of response :

Under this step, the baseline of frequency of response is found . It can be found by finding the frequency of identified behaviour under present conditions

3. Identify existing behavioural contingencies through functional analysis :

Under this step, behavioural contingencies are identified through A-B-C model of behaviour modification.

Here,

• A stands for Antecedent (what happens before the behaviour?)

• B, stands for Behaviour (what the person says or does?)

• C, stands for Consequences (what happens after the behaviour?)

4. Develop intervention strategy:

Under this step, intervention strategy is used to make the desirable behaviour either strong or weak through proper reinforcement and punishment strategy. Here, environment variables are considered like:

• Structure, 

• Technology 

• Task, 

• Process and 

• Groups 

5. Apply appropriate strategy:

Under this step, high level performances are made more rewarding through appropriate reinforcement principles:

• Positive reinforcement 

• Negative reinforcement 

• Extinction 

• Punishment or 

• Combination 

6. Measure chart frequency of response after intervention:

Under this step, Modeling and Shaping are made. If the problem is solved then next step is initiated otherwise the steps are repeated again from step number 4.

7. Maintain desirable behaviour :

Under this step, schedules of reinforcements are developed. They may be :

• Continuous, 

• Intermittent, 

• Self-reinforcement etc. 

8. Evaluate for performance improvements :

This is the final step. Under this step, evaluation is done to make sure that- whether the intervention strategy that was applied earlier has actually made the performance improvement or not.

Therefore, behaviour modification is the application of behaviorist’s operant conditioning principle to individuals in the organization setting.

The application of it in respect to organization are :

a. Improving the productivity of employee: 

High level performances are made more rewarding through appropriate reinforcement principles that ultimately improves the productivity of the employees.

b. Reducing absenteeism: 

The appropriate reinforcement and punishment strategy makes employee motivated toward the job.

c. Improving the discipline of employee: 

The intervention strategy is used to improve desirable behaviour and weaken undesirable behaviour. This helps to improve the discipline of the employees.

d. Minimizing the faults:

As the employees’ performance is improvised, faults are automatically minimized

e. Developing training programs:

Training programs could be given to the required employees for improvement of performance of the employees after knowing the evaluated performance improvement.

It is to be understood that, change of behaviour is influenced by stimulus and response.

It takes:

• Internal stimuli (like : personal characteristics, personality, emotions, values, beliefs, attitudes, ability ) and external stimuli (like: hearing, seeing, smelling, touching and tasting) as an inputs, 

• Processes -physiological (biological factors), cognitive (perception and thinking ) and psychological processes (learning and motivation) and 

• produces Output as - productivity, absenteeism, turnover, job satisfaction

• .  Finally, Feedback is received. The type of feedback determines the nature of stimulus and response. 

Behaviour of an individual is a continuous change process. Once the behaviour is understood, behaviour modification could be easily done. Behaviour modification helps us to understand the behaviour of human and helps to improvise the organizational performances.

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