Advanced Bank Managment

ADVANCED BANK
18]
INDIAN INSTITUTE OF BANKING & FINANCE
ADVANCED BANK
MANAGEMENT
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MISSION
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a process of education, training, examination, consultancy/counselling and continuing professional
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VISION
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field.
OBJECTIVES
• To facilitate study of theory and practice of banking and finance.
• To test and certify attainment of competence in the profession of banking and finance.
• To collect, analyse and provide information needed by professionals in banking and finance.
• To promote continuous professional development.
• To promote and undertake research relating to Operations, Products, Instruments, Processes, etc., in
banking and finance and to encourage innovation and creativity among finance professionals so that
they could face competition and succeed.
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ADVANCED BANK
MANAGEMENT
Indian Institute of Banking & Finance
macmillan
education
© INDIAN INSTITUTE OF BANKING & FINANCE, MUMBAI, 2023
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First published, 2023
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ADVANCED BANK MANAGEMENT
First Edition (2023)

Authored, Revised & Updated by: Ms. Anuradha Hait (Basu), Head of Department of Statistics, Thakur College of
Science & Commerce (Module A); Mr. Mrityunjay Kumar Gupta, Former Head-HR, BOI (Module B); Mr. P. D.
Sankaranarayanan, Former AGM & Faculty, State Bank Academy (Module C); Mr. Shivkumar Sareen, Advisor, IPPB
& Former GM & Chief Compliance Officer, BOI (Module D)
Vetted by: Mr. Butchi Babu, Former GM, BOI (Module A); Mr. G. S. Bhaskara Rao, Former DGM-Dev. HR, Central
Bank of India (Module B); Mr. S. C. Bansal, Ex-faculty IIBF (Module C)
“This book is meant for educational and learning purposes. The author(s) of the book has/have taken all reasonable
care to ensure that the contents of the book do not violate any copyright or other intellectual property rights of any person
in any manner whatsoever. In the event the author(s) has/have been unable to track any source and if any copyright has
been inadvertently infringed, please notify the publisher in writing for any corrective action.”
FOREWORD
Formal education will make you a living; self-education will make you a fortune.
-Jim Rohn
The banking sector, currently, is experiencing a transformation catalysed by digitalization and information
explosion with the customer as the focal point. Besides, competition from NBFCs, FinTechs, changing
business models, growing importance of risk and compliance, along with disruptive technologies, have
contributed to this radical shift. Such an ever-evolving ecosystem requires strategic agility and constant
upgradation of skill levels on the part of the Banking & Finance professionals to chart a clear pathway
for their professional development.
The mission of the Indian Institute of Banking & Finance is to develop professionally qualified
and competent bankers and finance executives primarily through a process of education, training,
examination, counseling and continuing professional development programs. In line with the Mission,
the Institute has been offering a bouquet of courses and certifications for capacity building of the
banking personnel.
The flagship courses/examinations offered by the Institute are the JAIIB, CAIIB and the Diploma in
Banking & Finance (DB&F) which have gained wide recognition among banks and financial institutions.
With banking witnessing tectonic shifts, there was an imperative need to revisit the existing syllabi for
the flagship courses.
The pivotal point for revising the syllabi was to ensure that, in addition to acquiring basic knowledge,
the candidates develop concept-based skills in line with the developments happening in the financial
ecosystem and to ensure greater value addition to the flagship courses and to make them more practical
and contemporary. This will culminate in creating a rich pool of knowledgeable and competent
banking & finance professionals who are capable of contributing to the sustainable growth of their
organizations.
Keeping in view the above objectives, the Institute had constituted a high-level Syllabi Revision
Committee comprising of members from public sector banks, private sector banks, co-operative banks
and academicians. On the basis of the feedback received from various banks and changes suggested by
the Committee, the syllabi of JAIIB & CAIIB have since been finalized.
The revised CAIIB syllabi will now have four compulsory subjects and one elective subject to be chosen
from the five elective subjects. The subjects under the revised CAIIB Syllabi are:
Compulsory
1. Advanced Bank Management
2. Bank Financial Management
3. Advanced Business & Financial Management
4. Banking Regulations and Business Laws
vi I FOREWORD
Elective
1. Risk Management
2. Information Technology & Digital Banking
3. Central Banking
4. Human Resources Management
5. Rural Banking
A new module on Compliance has been introduced in Advanced Bank Management with Compliance,
Corporate Governance and Audit becoming the focal point for a resilient banking system. New units
covering Risks in Foreign Trade, GIFT-city etc have been added in the Bank Financial Management.
The new subject on Advanced Business & Financial Management will cover the management principles,
the advanced concepts of Financial Management and emerging business solutions including Green
Finance and Sustainable Financing.
The subject Banking Regulations & Business Laws (BRBL) is designed to familiarise the professionals
with various laws concerning banking and finance with increased focus on case laws, court judgements
covering different areas of banking and finance.
The elective subjects on Risk Management, Information Technology & Digital Banking and Rural Banking
have also been thoroughly revised and will include new units to make the courses more contemporary.
Insofar as the electives on Central Banking and Human Resources Management are concerned, new
modules on NBFCs and Emerging Scenarios in HRM have been introduced respectively.
As is the practice followed by the Institute, a dedicated courseware for every paper/subject is published.
The present courseware on Advanced Bank Management has now been authored in line with the revised
syllabus for the subject. The book follows the same modular approach adopted by the Institute in the
earlier editions/publications.
While the Institute is committed to revise and update the courseware from time to time, the book should,
however, not be considered as the only source of information I reading material while preparing for
the examinations due to rapid changes being witnessed in all the areas concerning banking & finance.
The students have to keep themselves abreast with the current developments by referring to economic
newspapers/journals, articles, books and Government / Regulators’ publications I websites etc. Questions
will be based on the recent developments related to the syllabus.
Considering that the courseware cannot be published frequently, the Institute will continue the practice
of keeping candidates informed about the latest developments by placing important updates/Master
Circulars/ Master Directions on its website and through publications like IIBF Vision, Bank Quest, etc.
The courseware has been updated with the help of Subject Matter Experts (SMEs) drawn from respective
fields and vetted by practitioners to ensure accuracy and correctness. The Institute acknowledges with
gratitude the valuable contributions rendered by the SMEs in updating/vetting the courseware.
We welcome suggestions for improvement of the courseware.
Mumbai Biswa Ketan Das
2023 Chief Executive Officer
RECOMMENDED READING
The Institute has prepared comprehensive courseware in the form of study kits to facilitate
preparation for the examination without intervention of the teacher. An attempt has been made
to cover fully the syllabus prescribed for each module/subject and the presentation of topics may
not always be in the same sequence as given in the syllabus.
Candidates are also expected to take note of all the latest developments relating to the subject
covered in the syllabus by referring to Financial Papers, Economic Journals, Latest Books and
Publications in the subjects concerned.
ADVANCED BANK MANAGEMENT
SYLLABUS
MODULE A: STATISTICS
Definition of Statistics, Importance & Limitations & Data Collection, Classification & Tabulation
Importance of Statistics; Functions of Statistics; Limitation or Demerits of Statistics; Definitions;
Collection of Data; Classification and Tabulation; Frequency Distribution
Sampling Techniques
Random Sampling; Sampling Distributions; Sampling from Normal Populations; Sampling from Non
Normal Populations; Central Limit Theorem; Finite Population Multiplier
Measures of Central Tendency & Dispersion, Skewness, Kurtosis
Arithmetic Mean; Combined Arithmetic Mean; Geometric Mean; Harmonic Mean; Median and Quartiles;
Mode; Introduction to Measures of Dispersion; Range and Coefficient of Range; Quartile Deviation
and Coefficient of Quartile Deviation; Standard Deviation and Coefficient of Variation; Skewness and
Kurtosis
Correlation and Regression
Scatter Diagrams; Correlation; Regression; Standard Error of Estimate
Time Series
Variations in Time Series; Trend Analysis; Cyclical Variation; Seasonal Variation; Irregular Variation;
Forecasting Techniques
Theory of Probability
Mathematical Definition of Probability; Conditional Probability; Random Variable; Probability Distribution of
Random Variable; Expectation and Standard Deviation of Random Variable; Binomial Distribution; Poisson
Distribution; Normal Distribution; Credit Risk; Value at Risk (VaR); Option Valuation
Estimation
Estimates; Estimator and Estimates; Point Estimates; Interval Estimates; Interval Estimates and
Confidence Intervals; Interval Estimates of the Mean from Large Samples; Interval Estimates of the
Proportion from Large Samples
Linear Programming
Graphic Approach; Simplex Method
Simulation
Simulation Exercise; Simulation Methodology
MODULE B: HUMAN RESOURCE MANAGEMENT

Fundamentals of Human Resource Management
The Perspective; Relationship between HRM & HRD and their Structure and Functions; Role of HR
Professionals; Strategic HRM; Development of HR Functions in India
x SYLLABUS
Development of Human Resources

HRD and its Subsystems; Learning and Development - Role and Impact of Learning; Attitude
Development; Career Path Planning; Self-Development; Talent Management; Succession Planning
Human Implications of Organisations
Human Behaviour and Individual Differences; Employees Behaviour at Work; Diversity at Workplace and
Gender Issues; Theories of Motivation and their Practical Implications; ‘Role’: Its Concept & Analysis
Employees’ Feedback and Reward System
Employees’ Feedback; Reward and Compensation System
Performance Management
Appraisal Systems; Performance Review and Feedback; Counselling; Competency Mapping and
Assessment of Competencies; Assessment Centres; Behavioural Event Interview (BEI)
Conflict Management and Negotiation
Conflict: Concept & Definition; Characteristics of Conflict; Types of Conflicts; Reasons for Conflict;
Different Phases of Conflict; Conflict Resolution; Conflict Management; Negotiation Skills for Resolution
of Conflicts
HRM and Information Technology
Role of Information Technology in HRM; HR Information and Database Management; Human Resource
Information System (HRIS); Human Resource Management System (HRMS); e-HRM; HR Research;
Knowledge Management; Technology in Training; HR Analytics
MODULE C: CREDIT MANAGEMENT

Overview of Credit Management
Importance of Credit; Historical Background of Credit in India; Principles of Credit; Types of
Borrowers; Types of Credit; Components of Credit Management; Role of RBI Guidelines in Bank’s
Credit Management
Analysis of Financial Statements
Which are the Financial Statements; Users of Financial Statements; Basic Concepts Used in Preparation
of Financial Statements; Accounting Standards (AS); Legal Position Regarding Financial Statements;
Balance Sheet; Profit and Loss Account; Cash Flow Statement; Funds Flow Statement; Projected
Financial Statements; Purpose of Analysis of Financial Statements by Bankers; Rearranging the Financial
Statements for Analysis; Techniques used in Analysis of Financial Statements; Creative Accounting;
Related Party Transactions
Working Capital Finance
Concept of Working Capital; Working Capital Cycle; Importance of Liquidity Ratios; Methods of
Assessment of Bank Finance; Working Capital Finance to Information Technology and Software Industry;
Bills/Receivables Finance by the Banks; Guidelines of RBI for Discounting/Rediscounting of Bills by
Banks; Trade Receivables Discounting System (TReDS); Non-Fund Based Working Capital Limits;
Other Issues Related to Working Capital Finance
SYLLABUS I xi
Term Loans
Important Points about Term Loans; Deferred Payment Guarantees (DPGs); Difference between Term
Loan Appraisal and Project Appraisal; Project Appraisal; Appraisal and Financing of Infrastructure
Projects
Credit Delivery and Straight Through Processing
Documentation; Third-Party Guarantees; Charge over Securities; Possession of Security; Disbursal of
Loans; Lending under Consortium/Multiple Banking Arrangements; Syndication of Loans; Straight-
Through Loan Processing or Credit Underwriting Engines
Credit Control and Monitoring
Importance and Purpose; Available Tools for Credit Monitoring/Loan Review Mechanism (LRM)
Risk Management and Credit Rating
Meaning of Credit Risk; Factors Affecting Credit Risk; Steps taken to Mitigate Credit Risks; Credit
Ratings; Internal and External Ratings; Methodology of Credit Rating; Use of Credit Derivatives for
Risk Management; RBI guidelines on Credit Risk Management; Credit Information System
Restructuring/Rehabilitation and Recovery
Credit Default/Stressed Assets/NPAs; Wilful Defaulters; Non-cooperative borrowers; Options Available
to Banks for Stressed Assets; RBI Guidelines on Restructuring of Advances by Banks; Available
Frameworks for Restructuring of Assets; Sale of Financial Assets
Resolution of Stressed Assets under Insolvency and Bankruptcy Code 2016
Definition of Insolvency and Bankruptcy; To Whom the Code is Applicable; Legal Elements of the Code;
Paradigm Shift; Corporate Insolvency Resolution Process; Liquidation process; Pre-packed Insolvency
Resolution Process for stressed MSMEs
MODULE D: COMPLIANCE IN BANKS & CORPORATE GOVERNANCE

Compliance Function in Banks
Compliance Policy; Compliance Principles, Process and Procedures; Compliance Programme; Scope
of Compliance Function; Role & Responsibilities of Chief Compliance Officer (CCO)
Compliance Audit
Role of Risk Based Internal Audit and Inspection; Reporting Framework and Monitoring Compliance;
Disclosure Requirements; Accounting Standards; Disclosures under Listing Regulations of SEBI
Compliance Governance Structure
Organisational Structure; Responsibility of the Board and Senior Management; Compliance Structure at
the Corporate Office; Functional Departments; Compliance Structure at Field Levels; Internal Controls
and its Importance
Framework for Identification of Compliance Issues and Compliance Risks
Compliance Issues; Compliance Risk; Inherent Risk and Control Risk; Independent Testing and Effective
Audit Programme; Reporting Framework and Monitoring Compliance; Role of Inspection and Audit;
Loan Review Mechanism/Credit Audit; What is Good Compliance
xii I SYLLABUS
Compliance Culture and GRC Framework

How to Create Compliance Culture Across the Organisation; Governance, Risk and Compliance - GRC
Framework; Benefits of an Integrated GRC Approach; Whistle-blower Policy; The Components of a
Whistle-blower Policy; Reasons for Compliance Failures
Compliance Function and Role of Chief Compliance Officer in NBFCs
Framework for Scale Based Regulation for Non-Banking Financial Companies; Transition Path;
Framework for Compliance Function and Role of Chief Compliance Officer in Non-Banking Financial
Companies in Upper Layer and Middle Layer (NBFC-UL & NBFC-ML); Broad Contours of Compliance
Framework in NBFCs
Fraud and Vigilance in Banks
Definition of Fraud; Definition of Forgery; Areas in which Frauds are Committed in Banks; Banking and
Cyber Frauds; Fraud Reporting and Monitoring System; Vigilance Function in Banks; RBI Guidelines
for Private Sector and Foreign Banks on Internal Vigilance
CONTENTS
Foreword v
MODULE A: STATISTICS
1. Definition of Statistics, Importance & Limitations &
Data Collection, Classification & Tabulation 3
2. Sampling Techniques 17
3. Measures of Central Tendency & Dispersion, Skewness, Kurtosis 46
4. Correlation and Regression 71
5. Time Series 86
6. Theory of Probability 105
7. Estimation 134
8. Linear Programming 151
9. Simulation 161
MODULE B: HUMAN RESOURCE MANAGEMENT

10. Fundamentals of Human Resource Management 173
11. Development of Human Resources 197
12. Human Implications of Organisations 249
13. Employees’ Feedback and Reward System 286
14. Performance Management 307
15. Conflict Management and Negotiation 339
16. HRM and Information Technology 362
MODULE C: CREDIT MANAGEMENT

17. Overview of Credit Management 393
18. Analysis of Financial Statements 422
19. Working Capital Finance 447
20. Term Loans 468
21. Credit Delivery and Straight Through Processing 482
22. Credit Control and Monitoring 494
23. Risk Management and Credit Rating 501
24. Restructuring/Rehabilitation and Recovery 511
25. Resolution of Stressed Assets under Insolvency and Bankruptcy Code 2016 530
xiv I CONTENTS
MODULE D: COMPLIANCE IN BANKS & CORPORATE GOVERNANCE

26. Compliance Function in Banks 555
27. Compliance Audit 569
28. Compliance Governance Structure 592
29. Framework for Identification of Compliance Issues and Compliance Risks 613
30. Compliance Culture and GRC Framework 634
31. Compliance Function and Role of Chief Compliance Officer in NBFCs 656
32. Fraud and Vigilance in Banks 669
STATISTICS
Unit 1. Definition of Statistics, Importance & Limitations & Data Collection,
Classification & Tabulation
Unit 2. Sampling Techniques
Unit 3. Measures of Central Tendency & Dispersion, Skewness, Kurtosis
Unit 4. Correlation and Regression
Unit5. Time Series
Unit 6. Theory of Probability
Unit 7. Estimation
Unit 8. Linear Programming
Unit 9. Simulation
4 I ADVANCED BANK MANAGEMENT
1.0 OBJECTIVES
After studying this unit, you will be able to:
• Develop an understanding to use the proper methods to collect the data, employ the correct analyses,
and effectively present the results.
• Familiarise with Data Management techniques by using Classification, Tabulation and
Presentation.
• As Statistics is a crucial process behind how we make discoveries in science, make decisions based
on data, and make predictions, collecting correct data and present it properly and making it ready
for analysis and interpretation is very important. From this chapter, you will understand correctly
getting the data ready to be analysed and interpreted.
1.1 INTRODUCTION
The word6Statistics’ has been derived from the Latin word ‘statisticum’, Italian word ‘statistia’ and German
word ‘ statistik’, each of which means a group of numbers or figures that represent some information of
human interest. It was first used by professor Achenwell in 1749 to refer to the subject-matter as a whole.
Achenwell defined statistics as the political science of many countries.
In the early years statistics is to be used only by the kings to collect facts about the state, revenue of the
state or the people in the state of administrative or political purpose.
Gradually the use of statistics which means data or information has increased and widened. It is now used
in almost in all the fields of human knowledge and skills like Business, Commerce, Economics, Social
Sciences, Politics, Planning, Medicine and other sciences, physical as well as natural.
In many practical situations in life, we come across different types of data which are needed to be
understood, analysed, compared and interpreted correctly. For example, in a college we need to analyse
the data of marks obtained, in a hospital we need to analyse the data of number of patients having different
diseases, rate of mortality, Different types of data need to be analysed in Economics, Government and
Private organisations, Sports and in many other fields. Data mean information, which can be of two
types - Qualitative and Quantitative. Statistics means quantitative or numerical data, which can be used
for further calculations.
Statistical analysis of data can be comprised of four distinct phases:
1. Collection of data: In this first stage of investigation, numerical data is collected from different
published or unpublished sources, primary or secondary.
2. Classification and Tabulation of data: The raw data collected is to be represented properly for
further calculations. The raw data is divided into different groups or classes and represented in a
form of a table.
3. Analysis of data: Classified and Tabulated data is analysed using different formulas and methods
according to purpose of the study or investigation.
4. Interpretation of data: At the final stage, relevant conclusions are drawn after the data is thoroughly
analysed
DEFINITION OF STATISTICS. IMPORTANCE & LIMITATIONS ... I 5
1.2 IMPORTANCE OF STATISTICS

Statistics is the subject that teaches how to deal with data, so statistical knowledge helps to use proper
methods for collection of data, properly represent the data, use appropriate formula and methods to
analyse correctly and effectively get the results and interpret the data. Applications of Statistics is
important in every sphere of field - Business and economics, Medical, Sports, Weather forecast, Stock
Market, Quality Testing, Government decisions and policies, Banks, Different educational and research
organisations, etc.
1.2.1 Business and Economics

• In Business, the decision maker takes suitable policies and strategies based on information on
production, sale, profit, purchase, finance, etc.
• By using the techniques of time series analysis, the businessman can predict the effect of a large
number of variables with a fair degree of accuracy.
• By using ‘Bayesian Decision Theory’, the businessmen can select the optimal decisions to directly
evaluate the payoff for each alternative course of action.
• In Economics, Statistics is used to analyse demand, cost, price, quantity, different laws of demand
like elasticity of demand and consumer’s maximum satisfaction which is determined on the basis of
data pertaining to income and expenditure.
1.2.2 Medical
Statistics have extensive application in clinical research and medical field. Clinical research
involves investigating proposed medical treatments, assessing the relative benefits of competing therapies,
and establishing optimal treatment combinations.
1.2.3 Weather Forecast

Statistical methods, like Regression techniques and Time series analysis, are used in weather forecasting.
1.2.4 Stock Market

Statistical methods, like Correlation and Regression techniques, Time series analysis are used in forecasting
stock prices. Return and Risk Analysis is used in calculation of Market and Personal Portfolios and
Mutual Funds.
1.2.5 Bank
In banking industry, credit policies are decided based on statistical analysis of profitability, demand
deposits, time deposits, credit ratio, number of customers and many other ratios. The credit policies are
based on the application of probability theory.
1.2,6 Sports
Players use statistics to identify or rectify their mistakes.
A proper understanding of the statistics determines the success of a team or a single athlete.
1.3 FUNCTION OF STATISTICS

1. Statistics present the facts in definite form.
2. Statistics simplify complex data.
3. It provides a techniques of comparison.
4. Statistics study the relationship between two or more variables.
5. It helps in formulating policies.
6. It helps in forecasting outcomes.
1.4 LIMITATIONS OR DEMERITS OF STATISTICS

1. Statistics do not deal with Individuals
Statistical methods can’t be applied for individual values of the observations as for individual
observation, there is no point of comparing anything or analysing anything. Statistics is the study of
mass data or a group of observations and deals with aggregates of facts.
2. Statistics does not study Qualitative Data
Statistical methods can’t be applied for qualitative or non-numerical data. Statistics is the study of
only of those facts which are capable of being stated in number or quantity.
3. Statistics give Result only on an Average
Statistical methods are not exact. Generally, when we have large number of observations, it becomes
difficult to handle it. A part of the data (sample) is collected for study and draw conclusion from, as
a representative for the whole. As a result, the result obtained are not exactly same, had we analysed
the whole data. The results are true only on an average in the long run.
4. The results can be biased: The data collection may sometime be biased which will make the
whole investigation useless. Generally, this situation arises when data is handled by inexperienced
or dishonest person.
1.5 DEFINITIONS
Population
It is the entire collection of observations (person, animal, plant or things which is actually studied by a
researcher) from which we may collect data. It is the entire group we are interested in and from which
we need to draw conclusions.
Example
1. If we are studying the weight of adult men in India, the population is the set of weights of all men in
India.
DEFINITION OF STATISTICS, IMPORTANCE & LIMITATIONS ... I 7
2. If we are studying the grade point average of students of Mumbai University, the population is the
set of GPA’s of all students of Mumbai University.
Sample: Sometimes the population from which we need to draw conclusion is too large to study. At
times collecting data from too large a population becomes time-consuming and expensive. To save time
and money, generally a part of population is selected for study. A sample is a part (a group of units) of
population which is representative of the actual population. By studying the sample, it is expected that
valid conclusions are drawn about the whole group.
Example: The population for a study of infant health might be all children bom in India in one particular
year. The sample might be all babies bom on one particular day in that year.
Data can be classified into two types, based on their characteristics. They are:
1. Variates
2. Attributes
A characteristic that varies from one individual to another and can be expressed in numerical terms is
called variate.
Example: Prices of a given commodity, wages of workers, heights and weights of students in a class,
marks of students, etc.
A characteristic that varies from one individual to another but can’t be expressed in numerical terms is
called an attribute.
Example: Colour of the ball (black, blue, green, etc.), religion of human, etc.
Quantitative or Numerical variables can be further classified as discrete and continuous. A variate which
takes discrete or distinct value or in other words can take only a countable and usually finite number of
values is called Discrete Variable.
Example: Number of members in a family, Number of accidents, Age in years.
A variate that can take any value within a range (integral/fractional) is called Continuous Variable.
Example: Percentage of marks, Height, Weight.
A parameter is a numerical value or function of the observations of the entire population being studied.
A parameter is usually an unknown value that is fixed.
Example: Population mean, population median, population standard deviation, etc.
Since parameter is unknown, it has to be calculated or estimated from a sample. Statistic is used to
estimate parameter. A statistic is a quantity or function of the observations of the sample of data. It
is used to give information about unknown values in the corresponding population. For example, the
sample mean is used to estimate the parameter population mean. Statistic is also called Estimator.
1.6 COLLECTION OF DATA

Researchers or investigators need to collect data from respondents. There are two types of data.
1.6.1 Primary Data

Primary data is the data which is collected directly or first time by the investigator or researcher from
the respondents. Primary data is collected by using the following methods:
Direct Interview Method: A face to face contact is made with the informants or respondents (persons
from whom the information is to be obtained) under this method of collecting data. The interviewer asks
them questions pertaining to the survey and collects the desired information.
Questionnaires: Questionnaires are survey instruments containing short closed-ended questions
(multiple choice) or broad open-ended questions. Questionnaires are used to collect data from a large
group of subjects on a specific topic. Currently, many questionnaires are developed and administered
online.
Census and sample survey

In a census, data about all individual units (e.g., people or households) are collected in the population.
In a survey, data are only collected for a sub-part of the population; this part is called a sample. These
data are then used to estimate the characteristics of the whole population. In this case, it has to be ensured
that the sample is representative of the population in question. For example, the proportion of people
below the age of 18 or the proportion of women and men in the selected sample of households has to
reflect the reality in the total population.
1.6.2 Secondary Data

Secondary data are the Second hand information. The data which have already been collected and
processed by some agency or persons and is collected for the second time are termed as secondary data.
According to M. M. Blair, “Secondary data are those already in existence and which have been collected
for some other purpose.” Secondary data may be collected from
existing records, different published or unpublished sources, like WHO, UNESCO, LIC, etc., various
research and educational organisations, banks and financial places, magazines, internet, etc.
Distinction between primary and secondary data

1. The data collected for the first time is called Primary data and data collected through some published
or unpublished sources is called Secondary data.
2. The primary data in the hands of one person can become secondary for all others.
For example, the population census report is primary for the Registrar General of India and the
information from the report is secondary for others.
3. Primary data are original as they are collected first time from the respondents directly or by preparing
questionnaires. So they are more accurate than the secondary data. But the collection of primary
data requires more money, time and energy than the secondary data. A proper choice between the
two forms of information should be made in an enquiry.
1.7 CLASSIFICATION AND TABULATION

So, we learned about the different methods of collecting primary and secondary data. The raw data,
collected in real situations are arranged randomly, haphazardly and sometimes the data size is very large.
Thus, the raw data do not give any clear picture and interpreting and drawing any conclusion becomes
very difficult. To make the data understandable, comparable and to locate similarities, the next step is
classification of data. The method of arranging data into homogeneous group or classes according to
some common characteristics present in the data is called Classification.
Example: The process of sorting letters in a post office, the letters are classified according to the cities
and further arranged according to the streets.
Classification condenses the data by removing unimportant details. It enables us to accommodate large
number of observations into few classes and study the relationship between several characteristics.
Classified data is presented in a more organised way so it is easier to interpret and compare them, which
is known as Tabulation.
There are four important bases of classifications:
1. Qualitative Base: Here the data is classified according to some quality or attribute such as sex,
religion, literacy, intelligence, etc.
2. Quantitative Base: Here the data is classified according to some quantitative characteristic like
height, weight, age, income, marks, etc.
3. Geographical Base: Here the data is classified by geographical regions or location, like states, cities,
countries, etc. like population in different states of India.
4. Chronological or Temporal Base: Here the data is classified or arranged by their time of occurrence,
such as years, months, weeks, days, etc. This classification is also called Time Series data.
Example: Sales of a company for different years.
Types of Classification
1. If we classify observed data for a single characteristic, it is known as One-way Classification. Ex:
Population can be classified by Religion - Hindu, Muslim, Christians, etc.
2. If we consider two characteristics at a time to classify the observed data, it is known as a Two-way
classification. Ex: Population can be classified according to Religion and sex.
3. If we consider more than two characteristics at a time in order to classify the observed data, it is
known as Multi-way Classification. Ex: Population can be classified by Religion, sex and literacy.
1.8 FREQUENCY DISTRIBUTION

Frequency: If the value of a variable (discrete or continuous) e.g., height, weight, income, etc. occurs
twice or more in a given series of observations, then the number of occurrences of the value is termed
as the “frequency” of that value.
The way of representing a data in a form of a table consisting of the values of the variable with the
corresponding frequencies is called “frequency distribution”. So, in other words, Frequency distribution
2. Continuous Frequency Distribution: Variable takes values which are expressed in class intervals
within certain limits.
Problem 2: Marks obtained by 20 students in an exam for 50 marks are given below-convert the
data into continuous frequency distribution form.
18, 23, 28, 29, 44, 28, 48, 33, 32, 43, 24, 29, 32, 39, 49, 42, 27, 33, 28, 29.
Solution
Problem 3: Following data reveals information about the number of children per family for 25
families. Prepare frequency distribution of number of children (say variable x, taking distinct values
0, 1,2, 3,4).
3 2 112
4 0 12 3
1 2 0 4 2
2 12 3 2
1 3 4 0 1
Solution: Frequency distribution of number of children in 25 families
Number of children Number of families
Problem 4: For the following frequency distribution, prepare cumulative frequency distribution of less
than and greater than type
1 2 3 4 5
Solution
X Frequency Less than cf Greater than cf

1 5 5 43 + 5 = 48
2 7 5 + 7 = 12 36 + 7 = 43
3 15 12 + 15 = 27 21 +15 = 36
4 11 27 + 11 = 38 10 + 11 =21
5 6 38 + 6 = 44 4 + 6 = 10
6 4 44 + 4 = 48 4
Total 48
Problem 5: Following is the marks of 50 students. Prepare cumulative frequency distribution of both
the types. Also find Relative Frequencies.
Marks No. of Students
Solution
Problem 6: For the following frequency distribution, obtain cumulative frequencies, relative frequencies
and relative cumulative frequencies.
Class Interval 30-50 50-70 70—90 90-110 110-130 130-150

| Frequency 8 15 25 16 I 7 I 4
Solution
Class interval Freq Cumu. Frequency Relative Relative Cumu. frequency

Less than More than Frequency Less than More than
30-50 8 8 75 0.11 0.11 1.00
50-70 15 23 67 0.20 0.31 0.89
70-90 25 48 52 0.33 0.64 0.69
90-110 16 64 27 0.22 0.86 0.36
110-130 7 71 11 0.09 0.95 0.14
130-150 4 75 4 0.05 1 ,.00 0.05
Total 75 1.00
Problem 7: Represent the information given below with a suitable table.

1400 candidate were medically examined in afitness test, out ofwhich 21% were girls. From the doctor’s
report, it was found that 396 males and 104 females were unfit. 40 % of the remaining males and 60%
of the remaining females were in good health. The rest were declared as temporarily unfit.
Solution: Distribution of candidates according to Male/Female and Fitness
Fitness X Sex Male Female Total

Good health 284 114 398
Temp unfit 426 76 502
Unfit 396 104 500
Total 1106 294 1400
Problem 8: Tabulate the information given below.

In 2020, out of total of 3000 workers in a factory, 2300 were skilled workers.
The number of woman employees were 300 out of which 250 were unskilled.
In 2021, the number of skilled workers was 2750 of which 2500 were men. The number of unskilled
workers was 760 of which 300 were women.
Solution: Classification of workers according to sex and skill for the year 2020, 2021
Sex/
Skill Men Women Total
Year Skilled Unskilled Total Skilled Unskilled Total Skilled Unskilled Total
2020 2250 450 2750 50 250 300 2300 700 3000
2021 2500 460 2960 250 300 550 2750 760 3510
Problem 9: Out of total number of 2000 candidates interviewed for employment in a company, 628
were from Pune and the rest from Nashik. Amongst the graduate from Pune, 350 were experienced and
80 were unexperienced. While the corresponding figures for undergraduates from Nashik were 615 and
52 respectively. The total number of in experienced candidates from Pune and Nashik were 175 and 192
respectively.
Present the above information in a suitable tabular form.
Solution: Distribution of candidate from Pune and Nashik according to Education and Experience
Education Graduate Undergraduate Total

Experience
Exp Inexp Total Exp Inexp Total Exp Inexp Total
City
Pune 350 80 430 103 95 198 453 175 628
Nashik 565 140 705 615 52 667 1180 192 1372
Total 915 220 1135 718 147 865 1633 367 2000
Questions
1. The data of some worker’s salary are given as 2300, 2400, 2500, 2100, 2000, 2000, 2300, 2800,
3000, 2300, 2700, 2400, 2500. If desired number of class intervals is 10, class width is
(a) 100
(b) 200
(c) 300
(d) 400
2. The largest and smallest values of a data are 60 and 40 respectively. If desired number of class
intervals is 5, class width is
(a) 25
(b) 20
(c) 4
(d) 5
3. The class intervals where upper and lower limits are also in the class interval are called
(a) Exclusive type
(b) Inclusive type
(c) Discrete type
(d) Continuous type
4. The type of cumulative frequencies where the frequencies are added starting from the highest class
to the lowest class are called______________
(a) Relative Frequency
(b) Percentage Frequency
(c) Less than Cumulative Frequency
(d) Greater than Cumulative Frequency
5. The data classification, which is based on variables, like, demand, supply, height and weight is
considered as
(a) Qualitative data
(b) Quantitative data
(c) Time series data
(d) Discrete data
6. The data which is classified or arranged by their time of occurrence, such as years, months, weeks,
days, etc., is called
(a) Time series data
(b) Geographical data
(c) Historical data
(d) Both (a) and (c)
Answers
(a);
l. 2. (c); 3. (b); 4. (d); 5. (b); 6. (d)
Sampling Techniques
STRUCTURE
2.0. Objectives
2.1. Introduction
2.2. Random Sampling
2.3. Sampling Distributions
2.4. Sampling from Normal Populations
2.5. Sampling from Non-Normal Populations
2.6. Central Limit Theorem
2.7. Finite Population Multiplier
Keywords/Gloss ary
Questions
Annexure - Probability Table
2.0 OBJECTIVES
The objectives of this unit are as follows:
• Learn to take a sample from an entire population and use it to describe the population
• Make sure the samples represent the population.
• Introduce the concepts of sampling distributions
• Understand the tradeoff between costs of larger samples and accuracy
• Introduce experimental design - sampling procedures.
• Estimation - data analysis and interpretation of sample data
• Testing of hypotheses - one-sample data
• Testing of hypotheses - two-sample data
2.1 INTRODUCTION
As you know, statistics is a tool used in business and finance. Statistics is an appreciated and maligned
tool, depending on how it is used. We need statistical methods to reduce risk and uncertainty and improve
our decision-making skills. Decision making in a situation involves collecting data and then using it for
the future strategy. Usually. We cannot use the entire data because of the sheer size or numbers. Therefore,
we take a sample and test it. For example, if a milk plant processes 1 lakh litres of milk every day, one
cannot break open each packet and test the milk for quality. Here we take samples from each batch. If
we want to do a market survey, we cannot interview each and every household. We take a representative
sample. Thus, sampling becomes an integral tool of the quantitative methods we use. We take a sample,
collect data from the sample, and attempt to generalise the whole data results.
Tea tasters at tea auctions are very highly paid employees of tea companies. They sample a small portion
of the tea produced from the plantation before the auction. Food products are often tasted before being
sold. Before buying Diwali sweets, you may take a small bite before buying it. Obviously, everything
cannot be opened and tasted or tested as there would be nothing left to sell. We have to select a sample
and test that only. If you want to write a report on why many people are migrating from India to Canada
or Australia, contacting each Indian who migrated would be time consuming and expensive. So you
would choose a sample and make a report accordingly. Thus, time and size are decisive factors which
make it necessary to take business decisions on a sample. If your sample is properly chosen, your report
would truly reflect the reasons of the entire population for migration. Of course, the best results would
be available in any situation if we collected data from the entire population. Such complete enumeration
or census is used in the population census carried out in our country every ten years.
Statisticians use the word population to refer not only to people but to all items that are to be studied.
A sample is a part or subset of the population selected to represent the entire group. The word sample is
used to describe a portion chosen from the population, in other words.
We can describe samples and populations using mean, median, mode, and standard deviation measures.
When these terms describe a sample, they are called startsricand are not from the population but estimated
from the sample. When these terms describe a population, they are called parameters.
A statistic is a characteristic of a sample; a parameter is a population characteristic.
SAMPLING TECHNIQUES I 19
Conventionally, statisticians use lower case Roman letters to denote sample statistics and Greek or Capital
letters to denote population parameters.
Table 2.1 lists these symbols.
TABLE 2.1 Important Statistic Notation and Symbol
Population Sample
Definition Collection of all items Part of the population
Characteristics Parameters Statistics
Symbols Size - N Size - n
Mean - p Mean - X
Standard Standard
Deviation - a Deviation - q
Types of sampling
The process of selecting respondents is known as "sampling.9 The units under study are called
sampling units, and the number of units in a sample is called a sample size. There are two
methods of selecting samples from populations: non-random or judgement sampling and random or
probability sampling. In probability sampling, all the items in the population have a chance of being
chosen in the sample. In judgement sampling, personal knowledge or opinions are used to identify
the items from the population that are to be included in the sample. A sample selected by judgement
sampling is based on someone’s experience with the population. An oil drilling company would ask
an experienced geologist to test different terrains or land beneath the sea before deciding where to
explore for oil. Sometimes a judgement sample is used as a pilot or trial sample to decide how to
take a random sample later. If we want to launch a new city newspaper, a pilot test of the paper can
be launched at a judgement sample to see the response. But, the rigorous statistical analysis, which
can be done with random probability samples, cannot be done with judgement samples. On the other
hand, they are more convenient and can be used successfully even if we cannot test their validity.
But, if a study uses judgement sampling and loses a significant degree of representativeness, it will
have purchased convenience at a high price.
Biased samples
Suppose the Parliament is debating on the women’s bill. You are asked to conduct an opinion survey.
Because women are the most affected by the women’s bill, you interviewed many women in different
cities, towns and rural areas of India. Then you report that an overwhelming 95 per cent are in favour of
reservation for women in Parliament.
Sometime later, the government has to take up the issue of Foreign Direct Investment (FDI) in print media.
Since newspaper publishers are the most affected, you contact all of them, both national and regional,
in India and report that the majority is not in favour of FDI in print media.
In both these cases, you picked a biased sample by choosing people who would have strong feelings on
this issue. You have to have sound samples.
A report based on the data collected from such a biased sample would not truly reflect public opinion.
If we follow random sampling, it is possible to statistically determine the reliability of the estimates
obtained from the sample to avoid such errors.
2.2 RANDOM SAMPLING

There are four main types of random sampling.
1. Simple Random Sampling
2. Systematic Sampling
3. Stratified Sampling
4. Cluster Sampling
Simple Random Sampling

Simple Random Sampling selects samples by methods that allow each possible sample to have an
equal probability of being picked and each item in the entire population to be included in the sample.
Suppose we have four teenagers participating in a talk show. We want a sample of two teenagers at a
time to participate with the chat show host.
The following table illustrates the possible combinations of samples of teenagers, the probability of each
sample being picked and the probability that each teenager will be in a sample.
Teenagers A, B, C, D
Possible samples of two teenagers: AB, AC, AD, BC, BD, CD
Probability of drawing these samples of two people is the same as below:
P(AB)= 1/6
P(AC) = 1/6
P(AD) = 1/6
P(BC) = 1/6
P(BD) = 1/6
P(CD) = 1/6
You would observe that any one student appears in 3 of the 6 possible samples. Therefore, probability
of a particular student in the sample is:
P(A) = 1/2
P(B)= 1/2
P(C) = 1/2
P(D) = 1/2
The example illustrates a finite population of four teenagers. If we write A, B, C, and D on four identical
slips of paper, fold the papers, and randomly pick any two, we get a sample. While picking up two paper
slips, we may pick up one, keep it away, and pick another from the remaining three. This type is called
sampling without replacement
There is another way of doing it. Suppose after picking the first slip, we note the name on it and put the
slip back in the lot, i.e replace the paper slip. Then we draw the second slip. There is a chance that we
may draw the same student again. This is called sampling with replacement.
Theoretically, it is possible to have an infinite population. For example, the population of all prime
numbers is infinite. Although many populations seem exceedingly large, no truly infinite population of
physical objects actually exists. After all, given unlimited resources and time, one can enumerate any
finite population. As a practical matter, we will use the term infinite population when we are talking about
a population that could not be enumerated in a reasonable period of time. Thus, we use a theoretical
concept of infinite population as an approximation of a large finite population.
How to do Random Sampling?

Suppose there are 100 employees in a company, and we wish to interview a randomly chosen sample of
10. We write the name of each employee on a slip of paper and deposit the slips in a box. After mixing
them thoroughly, we draw 10 slips at random. The employees whose names are on these 10 slips, are
our random sample.
This method of drawing a sample works well with small groups of people but presents problems with
large populations. Also, add to this the problem of the slips of paper not being mixed well.
We can also select a random sample by using random numbers. These numbers can be generated either
by a computer programmed to scramble numbers, or by a table of random digits.
The table below shows some random digits. These numbers have been generated by a completely
random process. The probability that any one digit from 0 through 9 will appear is the same for each
digit, and the probability of one sequence of digits occurring is the same as for any other sequence of
the same length.
15,819 20,685 82,621 83,748 69,662

09,281 72,950 85,961 48,980 06,840
41,120 48,326 18,824 54,466 94,470
74,574 63,491 00,923 04,142 51,336
00,995 02,727 96,703 12,671 31,976
59,987 93,247 72,301 • 34,290 69,051
69,787 72,950 56,709 54,709 70,945
71,642 54,358 40,316 88,897 99,907
35,939 34,406 11,987 23,691 70,582
67,494 30,909 20,395 50,973 74,338
96,974 22,756 34,574 81,235 60,089

20,079 07,000 50,890 37,689 39,622
45,847 76,661 55,448 14,318 74,840
38,401 64,888 08,409 90,352 56,923
63,151 91,208 72,286 78,612 98,120
01,904 02,727 18,928 53,446 01,778
55,700 48,000 38,595 60,089 26,117
26,926 36,478 33,822 45,786 36,984
31,406 67,652 15,134 53,872 87,520
70,645 65,145 96,286 59,837 79,304
83,832 97,712 31,209 83,209 09,007
11,865 68,401 98,654 43,211 11,559
16,264 19,856 40,972 75,623 09,406
52,203 64,287 05,963 23,673 32,329
49,420 22,936 42,003 32,367 15,130
02,875 33,739 27,092 29,805 75,614
88,094 92,125 72,709 42,514 40,618
86,905 64,893 74,804 69,873 40,372
31,196 26,299 50,839 67,173 82,465
Let us see how to use this table. We assign each employee a number from 00 to 99, look up the table
above and pick a systematic method of selecting two-digit numbers, like the first two digits. So, we have
15, 09, and so on till we get our 10 numbers.
Systematic Sampling
In systematic sampling, elements are selected from the population at a consistent level that is measured in
time, order, or space. If we wanted to interview every twentieth student on a college campus, we would
choose a random starting point in the first twenty names in the student directory and then pick every
twentieth name after that.
Systematic sampling differs from simple random sampling in that each element has an equal chance
of being selected, but each sample does not have an equal chance of being selected. This would have
been the case if, in our earlier example, we had assigned numbers between 00 and 99 to our employees
and then began to choose our sample of 10 by picking every tenth number beginning 1, 11,21,31,
and so forth. Employees numbered 2, 3, 4 and 5 would have no chance of being selected together.
In systematic sampling, there is a probability of introducing an error into the sampling process. The system
chosen may cause a problem. If we want to check the chances of people eating out on different days of
the week, choose Friday. There is a higher likelihood of Friday as it is the beginning of the weekend,
and we get a higher result.
Systematic sampling has some advantages. Even though systematic sampling may be inappropriate when
the elements lie in a sequential pattern, this method may require less time and sometimes results in lower
costs than the simple random sample method.
Stratified Sampling
To use stratified sampling, we divide the population into relatively homogenous groups, called strata. Then
we use one of the following two approaches. Either we select at random from each stratum a specified
number of elements corresponding to the proportion of that stratum in the population as a whole or, we
draw an equal number of elements from each stratum and give weight to the results according to the
stratum’s proportion of the total population. With either approach, stratified sampling guarantees that
every element in the population has a chance of being selected.
When to use Stratified Sampling

Stratified sampling is appropriate when the population is already divided into groups of different sizes,
and we wish to acknowledge this fact. Example - middle class, upper class, lower middle class, etc. or
according to age, race, sex or any other stratification. A jeans company may want to study which age
group prefers to wear jeans the maximum. Thus the age groups may be 13 to 20,20 to 30, 30 to 40, or 40
plus. The advantages of stratified samples are that when they are properly designed, they more accurately
reflect the characteristics of the population from which they are chosen than do other kinds of samples.
Cluster Sampling
A well-designed cluster sampling procedure can produce a more precise sample at considerably less cost
than simple random sampling. In cluster sampling, we divide the population into groups or clusters and
then select a random sample of these clusters. We assume that these individual clusters are representative
of the population as a whole. Suppose a market Research team is attempting to determine by sampling
the average number of television sets per household in a large city. They could use a city map and divide
the territory into blocks and then choose a certain number of blocks (clusters) for interviewing. Every
household in each of these blocks would be interviewed.
Comparison of Stratified and Cluster Sampling

The population is divided into well-defined groups with both stratified and cluster sampling. We use
stratified sampling when each group has a small variation within itself, but there is wide variation between
the groups. We use cluster sampling in the opposite case - when there is considerable variation within
each group, but the groups are essentially similar.
Basis of Statistical Inference: Simple Random Sampling

Systematic sampling, stratified sampling and cluster sampling attempt to approximate simple random
sampling. All are methods that have been developed for their precision, economy or physical ease. How
ever, as we do problems, we shall assume that the entire sample we are talking about are data based
on simple random sampling. The process of making statistical inferences is based on the principles of
24 ADVANCED BANK MANAGEMENT
random sampling. Once you understand the basics of random sampling, the same can be extended to
other samples with some amendments which are best left to professional statisticians. It is important that
you get a grasp of the concepts concerned.
2.3 SAMPLING DISTRIBUTIONS

In this section, we presume you are familiar with mathematical concepts such as mean, mode, median,
standard deviation, etc. Each sample you draw from a population would have its own mean or measure
of central tendency and standard deviation. Thus, the statistics we compute for each sample would vary
and be different for each random sample taken.
Let us take an example.
We take a finite population of 5 young boys; A, B, C, D, and E, and collect data about their heights in
centimetres. The data is shown in Table 2.2.
TABLE 2.2 Sampling Distribution Table
| Boy A B • • c D
height (cm) 160 162 164 170 156
Now, if we take samples of size 3 (that is, select 3 boys in each sample), we will get 10 different samples.
We list these samples, the corresponding data and their mean in Table 2.3.
TABLE 2.3 Samples, Their Data and Mean
No 1 2 3 4 5 6 7 8 9 10
Sample ABC ABD ABE BCD BCE ACD ACE ADE BDE CDE
r
data 160 160 160 162 162 160 160 160 162 164
162 162 162 164 164 164 164 170 170 170
164 170 156 170 156 170 156 156 156 156
mean 162 164 159.33 165.33 160.66 164.66 160 162 162.66 163.33
From Table 2.3, you can see that sample mean for each sample is different. This collection of different
values of the sample mean for samples of size 3, forms a distribution of sample means. This distribution
has a mean. If we add all sample means in Table 2.3, and divide the sum by the number of samples, i.e.,
10, we get 162.397 (say, 162.40)
Normally, we will be dealing with large populations. Hence the number of samples of a particular size
is also very large.
Suppose we have to determine the proportion of sugar plants in a plantation affected by pest disease in
samples of 100 plants taken from a very large plantation. We have taken a large number of these 100 item
samples. If we plot a probability distribution of the proportions of infested plants in all these samples,
we would see a distribution of the sample proportion. (The term proportion here refers to the proportion
that is infected.) We could also have a sampling distribution of a proportion.
Sampling distribution is the distribution of all possible values of a statistic from all possible samples
of a particular size drawn from the population.
Describing Sampling Distributions

Any probability distribution (and, therefore, any sampling distribution) can be partially described
by its mean and standard deviation. Table 2.4 describes how different sampling distributions can be
described.
TABLE 2.4 Different Sampling Distribution
S. No. Population Sample Sample Statistic Sampling Distribution

1. Water in a River 10-one litre con Mean number of parts of Sampling distribution of
tainers of water mercury per million parts the mean
of water
2. All professional Groups of 5 Median height Sampling distribution of
basketball teams players the median
3. All parts pro 50 of each part Proportion defective Sampling distribution of
duced in a manu the proportion
facturing process
Each of the above sampling distributions can be partially described by its mean and standard
deviation.
Concept of Standard Error

The standard deviation of the distribution of the sample means is called the standard error of the mean.
Similarly, standard error of the proportion is the standard deviation of the distribution of the sample
proportions.
The term standard error is used because it has a very specific connotation. For example, we take various
samples to find the average heights of college girls across India and calculate the mean height for each
sample. Obviously, there would be some variability in the observed mean. This variability in sampling
statistics results from the sampling error due to chance. Thus, the difference between the sample and
population means is due to the choice of samples.
Thus, the standard deviation of the sampling distribution of means measures the extent to which the means
vary because of a chance error in the sampling process. Thus, the standard deviation of the distribution
of a sample statistic is known as the standard error of the statistic.
Thus, a standard error indicates the size of the chance error and the accuracy we are likely to get if we
use the sample statistic to estimate a population statistic. Thus, a mean with a smaller standard deviation
is a better estimator than one with a higher standard deviation.
The areas also show the probabilities under the probability curve shown in Fig. 2.2.
2.5 SAMPLING FROM NON-NORMAL POPULATIONS

In the preceding section, we stated that when the population is normally distributed, the sampling
distribution of the mean is also normal. But, we come across many populations that are not normally
distributed. How does the sampling distribution of the mean behave when the population from which the
samples are drawn is not normal? An illustration will help us answer this question.
Consider the data in Table 2.5, concerning five motorcycle owners and the life of the Tyres. Because
only five people are involved, the population is too small to be approximated by a normal distribution.
Let us take all of the possible samples of the owners in groups of three, compute the sample means (x)
list them, and compute the mean of the sampling distribution (|i_). We have done this in Table 2.5. These
calculations show that even in a case in which the population is not normally distributed, (p_), the mean
of the sampling distribution is still equal to the population mean, p.
TABLE 2.5 Experience of Five Motorcycle Owners with Life of Tyres
Owner Chetan (C) Dinesh (D) Eswar (E) Feroz(F) George (G)
Tyre Life in months 3 3 6 9 15
Total life = 36 months

Mean = 36/5 = 7.2 months
TABLE 2.6 Calculation of Sample Mean Tyre Life with n = 3
Samples of Three Sample Data Sample Mean
EFG 6 + 9 + 15 10
DFG 3 + 9 + 15 9
DEG 3 + 6+15 8
DEF 3+6+9 6
CFG 6+6+9 7
CEG 3 + 6 + 15 8
CEF 3+6+9 6
CDF 3+3+9 5
CDE 3+3+9 5
CDG 3 + 3 + 15 8
Total = 72 months
Mean = 7.2 months
Now, look at Fig. 2.3(a), which shows the population distribution of tyre lives for the five motorcycles
owners, a distribution that is anything but normal in shape. In Fig. 2.3(b), we show the sampling distribution
of the mean for a sample size of three, taking the information from Table 2.6. Notice the difference
between the probability distributions in Figs. 2.3(a) and 2.3(b). In Figure 2.3(b), the distribution looks a
little more like the bell shape of the normal distribution.
If we repeat this exercise and enlarge the population size to 40, we could take samples of different sizes.
Then plot the sampling distributions of the mean that would occur for the different sizes. This will show
quite dramatically how quickly the sampling distribution of the mean approaches normality, regardless
of the shape of the population distribution.
0.45 “
0.4 - ♦
0.35 -
0.3 -
0.25 -
0.2 -
0.15 -
0.1 -
0.05 -
0-I---------- 1------ ------ r
1------ ------ 1------ ♦------ 1------ —i
0 2 4 8 10 12 14 16
JIT aDD
FIGURE 2.3 (a) Problem Distribution

FIGURE 2.3 (b) Distribution of Mean Tyre Life
2.6 CENTRAL LIMIT THEOREM

The example in the above Table and the probability distribution in the above graphs tell us many things.
First, the mean of the sampling distribution of the mean will equal the population mean regardless of the
sample size, even if the population is not normal. As the sample size increases, the sampling distribution
of the mean will approach normality, regardless of the shape of the population distribution.
The Central Limit Theorem is the relationship between the shape of the population distribution and the
shape of the sampling distribution of the mean. The central limit theorem is perhaps the most important
in all statistical inference. It assures us that the sampling distribution of the mean approaches normal as
the sample size increases.
1. Actually, a sample does not have to be very large for the sampling distribution of the mean to approach
normal.
2. Statisticians use the normal distribution as an approximation to the sampling distribution whenever
the sample size is at least 30, but the sampling distribution of the mean can be nearly normal with
samples of even half the size.
3. The significance of the central limit theorem is that it permits us to use sample statistics to make
inferences about population parameters without knowing anything about the shape of the frequency
distribution of that population
Let’s illustrate the use of the central limit theorem. The distribution of annual earnings of all bank tellers
with five years’ experience is as shown below in Fig. 2.4. This distribution has a mean of Rs. 19,000 and
a standard deviation of Rs. 2,000. If we draw a random sample of 30 tellers, what is the probability that
their earnings will average more than Rs. 19,750 annually? In Fig. 2.4 we show the sampling distribution
of the means that would result and highlight the area representing ‘earnings over Rs. 19,750.’
Our first task is to calculate the standard error of the mean from the population standard deviation as
follows:
FIGURE 2.4
CT
Standard error of the mean
2000
2000
= Rs. 365.16
5.477
Because we are dealing with a sampling distribution, we must now use the equation for z value and the
Standard Normal Probability Distribution (App. Table z = (x - p)/ ct-
For x = Rs. 19750;
(19750-19,000)
365.16
750
~ 365.16
= 2.05
Annexure Table gives us the probability of 0.4798 for az value of 2.05. We show the corresponding area
in Fig. 2.4 as the area between the mean and Rs. 19,750. Since half or 0.5000 of the area under the curve
lies between the mean and the right-hand tail, the shaded area must be
0.5000 (Area between the mean and the right-hand tail)
- 0.4798 (Area between the mean and 19,750)
0.0202 (Area between the right-hand tail and 19,750)
Thus, we have determined that there is slightly more than a 2 per cent chance of average earnings being
more than Rs. 19,750 annually in a group of 30 tellers.
The central limit theorem is one of the most powerful concepts in statistics, which states that the distribution
of sample means tends to be a normal distribution. This is true regardless of the shape of the population
distribution from which the samples were taken.
Result 1: If X ~ Bin(n, p), then Z = ( ? tends to standard Normal Deviation as n —>
a/W
X-X
Result 2: If X ~ PX), then Z = __ tends to standard Normal Deviation as sample size —> «>
vX
Examples
1. A sample of 25 observations from a normal distribution has a mean of 98.6 and a standard deviation
of 17.2.
(a) What is P(92 < x < 102)?
(b) Find the corresponding probability given a sample of 36.
Solution:
(a) N= 25, p = 98.6,o= 17.2,
ax = o I yl~n~ = 17.2 IV25 = 3.44
P (92 < x < 102) = p[(92 - 98.6)/3.44 < (x - m)/s/ (102 - 98.6)/3.44]
= P (-1.72 < z < 0.99) = 0.4573 + 0.3389 = 0.7962
(b) n = 36, 0^=0/7^ = 17.2/736 = 2.87
P (92 < x < 102) = z?[(92 - 98.6)/2.87 < (x - p,)/o. < (102 - 98.6)/2.87]
= P(-2.30 < z < 1.18) = .4893 + 0.3810 = 0.8703
2. Kamala, an auditor for a large credit card company, knows that, on average, the monthly balance
of any given customer is Rs. 112, and the standard deviation is Rs. 56. If Kamala audits 50
randomly selected accounts, what is the probability that the sample average monthly balance is
(a) Below Rs. 100?
(b) Between Rs. 100 and Rs. 130?
Solution: The sample size of 50 is large enough to use the central limit theorem
p = 112, o = 56, n = 50, cr? = 56/ V50 = 7.920
(a) P(x < 100) = P[(x -p) /crv< (100-112)/ 7.920]
= P(z < -1.52) = 0.5 - 0.4357 = 0.0643
(b) P(100 < x < 130) = P[(l 00 -112) / 7.920 < (x -p) /o- < (130 -112) / 7.920]
= P(-1.52 < z < 2.27) = 0.4357 + 0.4884 = 0.9241
3. It has been found that 2% of the tools produced by a certain machine are defective. What is the
probability that in a shipment of 400 tools, 3% or more defective?
The sample size of 400 is large enough to use the central limit theorem.
—A
Solution: X ~ P (2 = np = 0.02*400 = 8), then Z = tends to standard Normal Deviation
3% of 400= 12
P(X > 12) = P[(x - 8)/V8 > (12 - 8))/V8 = P([(x - 8)/2.82 > 1.43) = 0.5 - 0.4236 = 0.0764
4. A coin is tossed 700 times. Using Normal approximation find the probability of getting number of
Heads between 280 and 375.
The sample size of 700 is large enough to use the central limit theorem.
z x X-np X-350
Solution: X~ Bin (n = 700, p = 0.5), then Z = ,---- =---------- tends to standard Normal Deviation
yjnpq 13.22
P(280 < X < 375) = P[(280 - 350)/13.22 < (X - 350)/l3.22 < (375 - 350)/l3.22)]
= P[-5.29 < Z < 1.89] = 0.5 + 0.4706 = 0.9706
An Important Consideration in Sampling: The Relationship between Sample Size

and Standard Error
We saw earlier in this chapter that the standard error, is a measure of the dispersion of the sample
means around the population mean. If the dispersion decreases (if av becomes smaller), then the
values taken by the sample mean tend to cluster more closely around m. Conversely, if the dispersion
increases (if becomes larger), the values taken by the sample mean tend to cluster less closely
around m. We can think of this relationship this way: As the standard error decreases, the value
of any sample mean will probably be closer to the value of the population mean. As the standard
error decreases, the precision with which the sample mean can be used to estimate the population
mean, increases.
If we refer to Equation, we can see that as n increases, s* decreases. This happens because, in an Equation,
a larger denominator on the right side would produce smaller s*. on the left side. Two examples will show
this relationship; both assume the same population standard deviation s of 100.
When n = 10, <y-=a / 4n
= 100/3.162 = 31.63, standard error of the mean.

And when n= 100:
Standard error of the mean; <y-= 100/V100 = 10
What have we shown? As we increased our sample size from 10 to 100 (a tenfold increase), the standard
error dropped from 31.63 to 10, which is only about one-third of its former value. Our examples show
that, because sx varies inversely with the square root of n, there is diminishing return in sampling.
It is true that sampling more items will decrease the standard error, but this benefit may not be worth the
cost. It seldom pays to take excessively large samples. Managers should always assess both the worth
and the cost of the additional precision they will obtain, from a larger sample, before they commit re
sources to take it.
2.7 FINITE POPULATION MULTIPLIER

In our discussion of sampling distributions, we have used the following equation to calculate the standard
error of the mean:
cr - = cr /
This equation is designed for situations in which the population is infinite, or in which we sample from
a finite population with replacement (that is, after each item is sampled, it is put back into the population
before the next item is chosen, so that the same item can possibly be chosen more than once).
In fact, many of the populations studied are finite; that is, of stated or limited size. Examples of these
include the employees in a given company, the clients of a city social-services agency, the students in a
specific class, and a day’s production in a given manufacturing plant. So, we need to modify the equation
to deal with finite populations. The formula designed to find the standard error of the mean, when the
population is finite, and we sample without replacement, is
Standard Error of the Mean for Finite Populations

cr N-n
N—\
where N = size of the population

n = size of the sample
The new term on the right-hand side, which we multiply by our original standard error, is called thefinite
population multiplier:
Finite Population Multiplier

N-n
Finite population multiplier =
N—\
N few examples will help us become familiar with interpreting and using the above equation. Suppose,
we are interested in a population of 20 textile companies of the same size, all of which are experiencing
excessive labour turnover. Our study indicates that the standard deviation of the distribution of annual
turnover is 75 employees. If we sample five of these textile companies, without replacement, and wish
to compute the standard error of the mean, we would use the equation as follows:
o N-n
n N-\
75 [20-5
’ x/5[V20-l
= (33.54)(0.888)
= 29.8 Standard error of the mean of a finite population
In this example, a finite population multiplier of 0.888 reduced the standard error from 33.54 to 29.8.
In cases in which the population is very large in relation to the size of the sample, this finite population
multiplier is close to 1 and has little effect on the calculation of the standard error. Say, that we have a
population of 1,000 items and that we have taken a sample of 20 items. If we use the Equation to calcu
late the finite population multiplier, the result would be
ftf-n
Finite population multiplier = j
(1000-20
” V 1000-1
(980
’ ^999
= 0.99
Using this multiplier of 0.99 would have little effect on the calculation of the standard error of the mean.
This last example shows that when we sample a small fraction of the entire population (that is, when the
population size N is very large relative to the sample size n), the finite population multiplier takes on a
value close to 1.0. Statisticians refer to the fraction n/Nas the sampling fraction, because it is the fraction
of the population TV that is contained in the sample.
When the sampling fraction is small, the standard error of the mean for finite populations is so close to
the standard error of the mean for infinite populations that we might as well use the same formula for
both, namely,
Equation ct- = ct / Vw
The generally accepted rule is: When the sampling fraction is less than 0.05, the finite population
multiplier need not be used.
When we use the above equation, s is constant, and so the measure of sampling precision sx depends only
on the sample size n and not on the proportion of the population sampled. That is, to make sx smaller, it is
necessary only to make n larger. Thus, it turns out that it is the absolute size of the sample that determines
sampling precision, not the fraction of the population sampled.
Although the law of diminishing return comes from economics, it has a definite place in statistics too.
It says that there is diminishing return in sampling. Although sampling more items will decrease the
standard error, (the standard deviation of the distribution of sample means) the increased precision
may not be worth the cost. Because n is in the denominator, when we increase it (take larger samples)
the standard error sx decreases. In our example, when we increased the sample size from 10 to 100 (a
tenfold increase) the standard error fell only from 31.63 to 10 (about a two-thirds decrease). Maybe it
wasn’t smart to spend so much money increasing the sample size to get this result. That’s exactly why
statisticians (and smart managers) focus on the concept of the “right” sample size. Some finite populations
are so large that they are treated as if they were infinite. An example of this would be the number of TV
households in our country.
Keywords/Glossary
Census The measurement or examination of every element in the population.
Sample: A portion of the elements in a population chosen for direct examination or measurement.
Strata: Groups within a population formed in such a way that each group is relatively homogeneous, but
wider variability exists among the separate groups.
Clusters: Groups, in population, that are similar to each other, although the groups themselves have wide
internal variation.
Random or probability sampling: A method of selecting a sample from a population in which all the
items in the population have an equal chance of being chosen in the sample.
Stratified sampling: It is a method of random sampling. The population is divided into homogeneous
groups or strata. Elements within each stratum are selected randomly according to one of two rules.
1. A specified number of elements is drawn from each stratum corresponding to the proportion of that
stratum in the population.
2. Equal numbers of elements are drawn from each stratum, and the results are weighted according to
the stratum’s proportion of the total population. .
Systematic sampling: A method of sampling in which elements to be sampled are selected from the
population at a uniform interval measured in time, order or space.
Cluster sampling: A method of random sampling. The population is divided into groups or clusters of
elements, and then a random sample of these clusters is selected.
Judgment sampling. It is a method of selecting a sample from a population in which personal knowledge
or expertise is used to identify the items from the population that are to be included in the sample.
Statistic: Measures describing the characteristics of a sample.
Parameters: Values that describe the characteristics of a population.
Sampling distribution of the mean A probability distribution of the means of all the possible samples
of a given size, n. from a population.
Sampling distribution of a statistic: For a given population, a probability distribution of all the possible
values a statistic may take on for a given sample size.
Sampling error: Error or variation among sample statistic. Differences between each sample and the
population and among several samples, which are due to the elements we happen to choose for the sample.
Standard error: The standard deviation of the sampling distribution of a statistic.
Standard error of the mean: The standard deviation of the sampling distribution of the mean, a measure
ment the extent to which we expect the means from different samples to vary from the population mean,
owing to the chance error in the sampling process.
Statistical inference: The process of making inferences about populations from information contained in
samples.
Central Limit Theorem: The theorem states that the sampling distribution of the mean approaches
normality as the sample size increases, regardless of the shape of the population distribution from which
the sample is selected.
Finite population: A population having a stated or limited size.
Finite population multiplier: A factor used to correct the standard error of the mean for studying a
population of a finite size that is small concerning the size of the sample.
Infinite population: A population in which it is theoretically impossible to observe all the elements.
Sampling with replacement: A sampling procedure in which sampled items are returned to the population
after being picked so that some members of the population can appear in the sample more than once.
Sampling without replacement: A sampling procedure in which sampled items are not returned to the
population after being picked so that no member of the population can appear in the sample more than once.
Equations Introduced in the Unit

Equation 1 cr- = cr / Vn
Use this formula to derive the standard error of the mean when the population is infinite, that is, when
the elements of the population cannot be enumerated in a reasonable period, or when we sample with
replacement. This equation states that the sampling distribution has a standard deviation, which we also call
a standard error, equal to the population standard deviation divided by the square root of the sample size.
Equation 2 z = (x — p) /o -
A modified version of the equation allows us to determine the distance of the sample mean x from the
population mean p, when we divide the difference by the standard error of the mean sf Once we have
derived a z value, we can use the Standard Normal Probability Distribution Table and compute the
probability that the sample mean will be that distance from the population mean. Because of the central
limit theorem, we can use this formula for non-normal distributions if the sample size is at least 30.
o N—n
Equation 3 ar=“/=
dn A-l
where N = size of the population; n = size of the sample

This is the formula for finding the standard error of the mean when the population is finite, that is, of
stated or limited size, and the sampling is done without replacement.
Equation 4 Finite population multiplier =

v v-i
In Equation 3, the term = A——which we multiply by the standard error from Equation (1), is called
the finite population multiplier. When the population is small in relation to the size of the sample, the finite
population multiplier reduces the size of the standard error. Any decrease in the standard error increases
the precision with which the sample mean can be used to estimate the population mean.
Questions
1. Explain Random Numbers.
2. What is a Sampling distribution?
3. What is sample mean?
4. Explain the Distribution of all sample means.
5. Define Standard Error.
6. We have a population of 10,000, and we wish to sample 20 randomly. Use a random number table
to choose the sample.
7. A population comprises groups that have wide variations within the group and less variation from
group to group. Which is the appropriate type of sampling method?
8. Explain: Sampling allows us to be cost-effective. We have to be careful in choosing representative samples.
9. Suppose you are sampling from a population with a mean of 5.3. What sample size will guarantee that
(a) The sample mean is 5.3?
(b) The standard error of the mean is zero?
10. In a sample of 16 observations from a normal distribution with a mean of 150 and a variance of 256,
what is
(a) P(x< 160)?
(b) P(x> 142)?
If, instead of 16 observations, 9 observations are taken, find
(c) P(x<160)?
(d) P(x> 142)?
11. In a sample of 19 observations from a normal distribution with mean 18 and standard deviation 4.8
(a) What is P(16 <x < 20)?
(b) What is P(16 £x £ 20)?
(c) Suppose the sample size is 48. What is the new probability in part(a)?
12. In a normal distribution with a mean of 56 and standard deviation of 21, how large a sample must
be taken so that there will be at least a 90 per cent chance that its mean is greater than 52?
13. In a normal distribution with a mean of 375 and a standard deviation of 48, how large a sample must be
taken so that there will be at least a 0.95 probability that the sample mean falls between 370 and 380?
14. The average cost of a flat at Powai lake is Rs. 62 lakh, and the standard deviation is Rs. 4.2 lakh.
What is the probability that a flat at this location will cost at least Rs. 65 lakh?
15. State whether the following statements are true or false.
(a) When the items included in a sample are based on the judgement of the individual conducting
the sample, the sample is said to be non-random. True/False
(b) A statistic is a characteristic of a population. True/False
(c) A sampling plan that selects members from a population at uniform intervals in time order or
space is called stratified sampling. True/False
(d) As a general rule, it is not necessary to include a finite population multiplier in computation for
the standard error of the mean when the sample size is greater than 50. True/False
(e) The probability distribution of means of all the possible samples is known as the sample
distribution of the mean. True/False
(f) The principles of simple random sampling are the theoretical foundation for statistical inference.
True/False
(g) The standard error of the mean is the standard deviation of the distribution of sample means.
True/False
(h) A sampling plan that divides the population into well-defined groups from which random samples
are drawn is known as cluster sampling. True/False
(i) With increasing sample size, the sampling distribution of the mean approaches normality,
regardless of the distribution of the population. True/False
(j) The standard error of the mean decreases with an increase in sample size. True/False
(k) To perform a complete enumeration, one would need to examine every item in a population.
True/False
(l) In everyday life, we see many examples of infinite populations of physical objects. True/False
(m) To obtain a theoretical sampling distribution, we consider all the samples of a given size.
True/False
(n) Large samples are always a good idea because they decrease the standard error. True/False
(o) If the mean for a certain population were 15, most of the samples we could take from that
population would likely have a mean of 15. True/False
(p) The standard error of a sample statistic is the standard deviation of its sampling distribution.
True/False
(q) Judgement sampling has the disadvantage that it may lose some representativeness of a sample.
True/False
(r) The sampling fraction compares the size of a sample to the size of the population. True/False
(s) Any sampling distribution can be totally described by its mean and standard deviation.
True/False
(t) The precision with which the sample mean can estimate the population mean decreases as the
standard error increases. True/False
UNIT Measures of Central Tendency
3 & Dispersion, Skewness,

Kurtosis
STRUCTURE
3.0 Objectives
3.1 Introduction to Measures of Central Tendency
3.2 Arithmetic Mean
3.3 Combined Arithmetic Mean
3.4 Geometric Mean
3.5 Harmonic Mean
3.6 Median and Quartiles
3.7 Mode
3.8 Introduction to Measures of Dispersion
3.9 Range and Coefficient of Range
3.10 Quartile Deviation and Coefficient of Quartile Deviation
3.11 Standard Deviation and Coefficient of Variation
3.12 Skewness and Kurtosis
Keywords
Questions

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ADVANCED BANK

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To know more about NAB please visit our website

Established on 30th April 1928

COMMI ITED TO PROFESSIONAL EXCELLENCE

Indian Institute of Banking & Finance

First published, 2023

MACMILLAN EDUCATION INDIA PRIVATE LIMITED

Published by Macmillan Education India Private Limited

Printed at: Capital Offset, Bawana Ind. Area Delhi-39

ADVANCED BANK MANAGEMENT

First Edition (2023)

MODULE B: HUMAN RESOURCE MANAGEMENT

Development of Human Resources

MODULE C: CREDIT MANAGEMENT

MODULE D: COMPLIANCE IN BANKS & CORPORATE GOVERNANCE

Compliance Culture and GRC Framework

MODULE B: HUMAN RESOURCE MANAGEMENT

MODULE C: CREDIT MANAGEMENT

MODULE D: COMPLIANCE IN BANKS & CORPORATE GOVERNANCE

1.2 IMPORTANCE OF STATISTICS

1.2.1 Business and Economics

1.2.3 Weather Forecast

1.2.4 Stock Market

1.3 FUNCTION OF STATISTICS

1.4 LIMITATIONS OR DEMERITS OF STATISTICS

1.6 COLLECTION OF DATA

1.6.1 Primary Data

Census and sample survey

1.6.2 Secondary Data

Distinction between primary and secondary data

1.7 CLASSIFICATION AND TABULATION

1.8 FREQUENCY DISTRIBUTION

Number of children Number of families

X Frequency Less than cf Greater than cf

Marks No. of Students

Class Interval 30-50 50-70 70—90 90-110 110-130 130-150

Class interval Freq Cumu. Frequency Relative Relative Cumu. frequency

Problem 7: Represent the information given below with a suitable table.

Fitness X Sex Male Female Total

Problem 8: Tabulate the information given below.

Education Graduate Undergraduate Total

TABLE 2.1 Important Statistic Notation and Symbol

2.2 RANDOM SAMPLING

Simple Random Sampling

How to do Random Sampling?

15,819 20,685 82,621 83,748 69,662

96,974 22,756 34,574 81,235 60,089

When to use Stratified Sampling

Comparison of Stratified and Cluster Sampling

Basis of Statistical Inference: Simple Random Sampling

2.3 SAMPLING DISTRIBUTIONS

TABLE 2.2 Sampling Distribution Table

TABLE 2.3 Samples, Their Data and Mean

Describing Sampling Distributions

TABLE 2.4 Different Sampling Distribution

S. No. Population Sample Sample Statistic Sampling Distribution

Concept of Standard Error

2.5 SAMPLING FROM NON-NORMAL POPULATIONS

TABLE 2.5 Experience of Five Motorcycle Owners with Life of Tyres