Evolution of Indian Banking System
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Transcript of Evolution of Indian Banking System
EVOLUTION OF INDIAN BANKING SYSTEM:
Banking in India has its origin as early as the Vedic period. S.K Ghosh(1991) believed that the transition from
money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a
section of his work to deposits and advances and laid down rules relating to rates of interest. According to
Maheshwari(2005), during the Moghuls period, the indigenous bankers played a very important role in lending
money and financing foreign trade and commerce. Banking in India originated in the eighteenth century. The
first banks were The General Bank of India which began operations in the year 1778, followed by The Bank of
Hindustan. Both these bank are not under operation now. The Bank of Calcutta was the next one to start its
operation In June 1806 followed by the Bank of Bombay and Bank of Madras. These three together constituted
the Presidency Bank and were established under the charters from the British East India Company. These banks
for many years acted as the quasi central banks. The three banks merged in 1925 to form the Imperial Bank of
India, which upon India’s independence became the State Bank of India. (Charles Albert, 1995)
The Union Bank was establishes in the year 1838, but failed in the year 1848 because of the economic crisis of
1848-49. The Allahabad Bank, established in 1865 is the oldest Joint Stock Bank in India. With the advent of
trade many banks opened up during this period but most of them failed because of the dealing with speculative
ventures. Due to this the depositors lost money and interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for several next decades until the beginning of the
twentieth century. Foreign banks too started to arrive, particularly in Calcutta in the 1860s.The comptoire d’
Escompte de Paris opened in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and
Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most
active trading port in India, mainly due to the trade of the British Empire, and so became a banking centre. As
per Masood (2003) the first Indian Joint Stock bank was Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was Punjab National Bank, established in Lahore in 1895, which has
survived to the present and is now one of the largest in India. At the turn of the twentieth century, many small
banks, most of which served particular ethnic and religious communities. The presidency banks dominated
banking in India but there were also some exchange banks and a number of Indian Joint stock banks. All these
banks operated in different segments of the economy. Gulati (2007) says that Indian Joint stock banks were
generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange
banks. The period between 1906 and 1911, was the establishment of banks inspired by the “Swadeshi
movement”. This movement inspires local businessmen and political figures and due to this a number of banks
were established and the most prominent one which have survived till date are Bank of India, Corporation Bank,
Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The period between the First World War
and the Second World War was challenging for the Indian Banking. These years took a toll on the banks with
many banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic
activities. At least 94 banks in India failed between 1913 and 1918.
India’s independence marked the end of a regime of laissez-faire for the Indian banking. The Government of
India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy
Resolution adopted by the government in 1948 envisaged a mixed economy. Despite these provisions, control
and regulations, banks in India except the State Bank of India, continued to be owned and operated by private
persons. This all changed with the nationalization of major banks in India on 19 July, 1969.
NATIONALISATION:
The Indian banking industry had emerged as a large employer and a debate had ensued about the possibility to
nationalize the banking industry. Indira Gandhi, the Prime Minister of India expressed the intention of the
Government of India in the annual conference of the All India Congress Meeting. Her move was swift and
sudden, and the GOI issued an ordinance and 8 nationalized the fourteen largest commercial banks with effect
from the midnight of July 19, 1969. A second dose of nationalization of six more commercial banks followed in
1980. The reason stated for the nationalization was to give government more control of credit delivery. With this
the government owned ninety one percent of the banking business of India. In the year 1993, the government
merged new bank of India with the Punjab National Bank. It was the only merger between the nationalized
banks and resulted in the reduction of the number of nationalized banks from twenty to nineteen.
Financial Market:
In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial
banking and asset management business. With the openings in the insurance sector for these institutions, they
started making debt in the market. Competition among financial intermediaries gradually helped the interest
rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high
price while depositors had incentives to save. It was something between the nominal rate of interest and the
expected rate of inflation.
Regulators:
The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The
Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more
independent. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development
Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator
for the financial services sector instead of multiplicity of regulators.
The Banking System:
Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the
commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The RBI has
given licences to new private sector banks as part of the liberalization process. The RBI has also been granting
licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are
yet to deliver services to industrial finance, retail trade, small business and agricultural finance. The PSBs will
play an important role in the industry due to its number of branches and foreign banks facing the constraint of
limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the
Government to encourage the PSBs to be run on professional lines.
2.3 CLASSIFICATION OF BANKS:
On the basis of ownership banks can be classified as Public sector banks, private sector banks and cooperative
banks.
Public Sector Banks: Public sector banks are those banks that are owned by the government. The government
owns these banks. In India 20 banks were nationalised in 1969 and 1980 respectively. Social welfare is their
main objective. Among public banks the bulk of banking business is dominated by the state bank of India (SBI)
and seven associate institutions. The SBI group was form after the Imperial Bank of India was nationalised in
1955.After India’s independence, the RBI held a majority share in eight banks. Following the enactment of SBI
act of 1959, these eight banks later became the subsidiaries of the SBI. Two of this subsidiary bank merged to
form the State Bank of Bikaner and Jaipur. (Berry.S et all 2004)
Altogether there are 302 commercial banks in India, with 223 banks in public sector. Out of these 196 are
regional rural banks were set up jointly by the RBI, state governments and sponsoring commercial banks with a
view to develop the rural economy credit to small farmers artisans and other individuals engaged in agriculture.
In addition to regional rural banks as well as the SBI as its associates, India’s public sector bank includes 20
nationalised public commercial banks. During the initial stages of India’s independence, private commercial
banks continued to operate freely. On the other hand public sector banking was closely integrated into the
development plans of the Government of India. Excluding SBI the four largest public sector banks are Bank of
Baroda, Canara Bank, The Bank of India and the Punjab National Bank (Kaptan.S.S and Choubey.S.H 2003)
Private Sector Banks: These banks are owned and run by the private individuals. An individual has control over
these banks in proportion to the shares of the banks held by him. India has 34 domestic private banks. Some of
the India’s most private bank has a long tradition in that country. Among 34 private banks in India, 25 were
founded before independence. Many banks found during colonial rule continue to operate today. For instance,
City Union Bank was founded in 1904 and Karur Vysya Bank was founded in 1916.These banks are often
referred as old private sector banks. Domestic private sector banks account for 10 percent of total bank assets
and 9 percent of branches of commercial banks.
Following India’s Independence there were no private banks chartered in India. This restriction came to an end
in 1993 when a new set of small private sector banks were allowed to operate. They include Centurion Bank,
Global Trust Bank, Industrial Credit and Investment Corporation of India (ICICI) bank, IndusInd Bank and
Times Bank. By 2002 Reserve Bank of India(RBI) approved two additional private banks to operate.
IndusInd was the first private bank to be established in India since its independence. IndusInd has also been a
pioneer in internet banking in India. New domestic private banks also differ from other commercial banks in its
efforts to grow aggressively. Beginning in February 2000,Times Bank has merged with the housing
Development Finance Corporation(HDFC).A merger with the Bank of Madura has made ICICI one of the
largest private sector banks in India, with a combined assets of eight billion dollars. In 1999, ICICI bank had
150,000 workers and 64 bank branches across india. The merger has increased the ICICI customer base to over
three million people.(Ray.P 2008)
Co-operative Banks: These are those banks that are jointly run by a group of individuals. Each individual has an
equal share in these banks. Its shareholders manage the affairs of the bank.
2.4 Difference between private and public banks:
Banking is an institution where security of money plays an important role with accessibility. During the time of
investment the investor will try to invest his earning in a bank where the outcome is more and less risky. This is
top most important for nation like India where people are of savvy nature of their hard earn money.
The profitability is not the objective of Indian banks; there have not been many attempts to compare the
profitability amongst the various categories of banks. Verma (2001) attempted to determine the determinants of
profitability of SBI group, other nationalized and foreign banks in India. Sarkar & Das(1999) compared
performance of Public Sector Banks, Private Banks, and Foreign Banks on basis of financial management. On
the other hand Ram Mohan (2000) found that over these years the profitability of the Public sector Banks did
improve in comparison to the Private and Foreign Banks, but they have lagged behind in their ability to attract
investors at favourable interest rates and returns, they have been slow in technology up gradation and
improving staffing and employment practices, which may have negative implications on their longer–term
profitability.
Ram Mohan (2000) found that the public sector banks are less profitable than the private sector and foreign
banks in terms of overall profitability but their profitability is improving over the last five years. Analyzing
further, Rishi and Saxena (2004) found that public sector banks are ranked second after the Private Banks,
because they have higher burden which makes them less profitable as compared to the other banks. The Interest
rates is declining over the years for all categories of banks because over the last five year RBI has pursued the
policy of lowering the interest rates. The Interest earned ratio for the Indian Banks has almost been the same
across all categories. The interest paid rate of private sector banks are little more than the public sector bank.
This is a case of tactful management through which the private sector banks are able to fetch huge funds on the
basis of attractive interest rates. The RBI administers the interest rates of Public sector Banks and they have
little control over the lending and borrowing rates.
The private banks have traditionally been viewed as high cost operators. The reason for high operating expenses
is that these banks have been spending heavily on technology up gradation which may affect their profitability
in short term but which will improve their long-term returns as they leverage the technology to provide better
customer support. Another reason for heavy operating expenses is these banks are spending heavily on their
advertising campaign for brand promotion. The nationalized banks do not require spending on promotions, as
“Government Bank or Public Bank” is still a popular brand for Indian customer as far as money matters are
concerned. However, the situation has changed very fast in these five years. Public sector banks, in order to
compete with the other banks have realized that in order to remain in competitive market, Technology is the key
and are now expending heavily on the technology up gradation. The private banks are fully technology oriented
which makes the work easier and faster. ICICI Bank and HDFC Bank are the best example to describe the
development of the Private Sector Banks in India. They stand almost next to the biggest nationalized bank of
India that is STATE BANK OF INDIA. In a short span of time they have the biggest customer base. The
government and RBI has poor control over private banks. (Mishra, 2001)
Public banks have far better reach to remote people than any Private Banks. As public sector banks have a large
network of branches in rural and semi urban areas as well, where as private banks do not have branches in both
rural and semi urban areas, but when compare to per branch bank deposit public bank have much lower than the
private banks.
Performance of public and private sector banks:
The performance and the roles of private and public sector banks are undergoing changes. The banks, both
private as well as public have to now operate in an increasingly competitive environment. The competition for
public sector banks is coming from the private sector banks. Despite having the advantage of a substantial
presence and penetration in the rural areas, the public sector banks are under tremendous pressure to maintain
their margins and to survive the competition. The customer-centric approach of private sector banks have
thrown open many more challenges for the public sector banks especially in retaining customers and expanding
customer base. We have compared Public and Private sector banks based on 11 parameters, which are critical
while evaluating their performance. These criteria are as follows
1. Assets and Liabilities
2. Share in Aggregate Deposits
3. Priority Sector Lending
4. Sensitive Sector Lending
5. Credit Deposit Ratio
6. Cost of Funds and Return on Funds
7. Operating Profit and Net Profit
8. Net Profitability of Banks
9. Gross and Net NPAs
10. Capital Adequacy Ratio
11. ATM’s
STRATEGIES AND CHALLENGES:
The strategies and challenges for private and public banks are as follows
PUBLIC SECTOR BANKS
The public sector banks are turning the spotlight on the customer and offering quicker, better service. That
includes everything from ATM machines and computerized branches to never before seen marketing initiatives.
Clearly, public sector banks have woken up to competition. Post-liberalization, several new generation private
sector banks changed the face of the industry. Customers no longer had to stand in long queues or make 10 trips
for loans to be sanctioned. These changes are taking place at a particularly fast pace in few of the banks
including the State Bank of India, Corporation Bank, Indian Bank, Bank of Baroda and the Union Bank of India.
Private sector banks brought in concepts like customer relations officers focused teams and single window
banking. Moreover, with new technology, private sector banks like ICICI and HDFC Bank could offer customer
services like ATMs, phone banking, internet banking, automatic money transfer, mobile banking, Core banking
solutions and computerized monthly statements. Recently a new technology of cheque truncation is being
introduced.
Public sector banks focus had earlier remained on industrial credit, which was slowing down. Lending to
corporate mean higher margins for banks. As interest rates came down corporate began to consider alternate
sources of funds. Banks then began to explore possibilities like retail lending.
The two important challenges for public sector banks are.
To maintain profitability in spite of government norms and regulations, as to maintain their PLR.
Put in place appropriate technology of excellent standards that will make them be seen more as virtual
banks rather than brick and mortar.
This will lead to consolidation of their respective network. They must be given autonomy -- operational and
administrative -- and be completely board driven, including in the selection of the chief executive officer.
Finally, they must be taken out of the purview of the Central Vigilance Commission, even if it entails bringing
them under the Companies Act. They need to improve in the services like ATMs, Credit and Debit cards. They
lack behind in providing facilities like loans and other accounts. These branches are not interlinked with each
other and customers visiting hours are less.
PRIVATE SECTOR BANKS:
There are two types of private sector banks, the old and the new. As far as the old (mostly regional banks) are
concerned, inadequacy of capital will lead to their mergers sooner rather than later. Private sector banks have
good technology for handling transactions and also offer attractive products, but it cannot be said that corporate
governance and risk management are far superior to that of the Public Sector Banks.
Some of the most important challenges for private sector banks are:
Priority sector credit: Generally, private sector banks lend money to individuals and corporate sector
whereas sectors like agriculture, small-scale industries and retail trade small business is neglected
Consolidation and Convergence: The recent merger that happened was of Lord Krishna Bank with
Centurion Bank. RBI may be inclined to approve the merger. The regulator, which has been insisting
on promoters of smaller banks to lower their holdings, would possibly prefer such mergers. Centurion
Bank of Punjab needs the additional business to compensate for its relatively higher cost structures. It
can cross-sell its banking products through the LKB network, including traditional banking products
and fee-based services like wealth management products, to affluent NRI customers.
Conclusion for strategies and challenges:
In any banking system, no bank -- public or private -- can survive unless it continuously strives to transform its
organization into a self-governing, self-correcting and self-adjusting entity. For banks to grapple with these
problems and manage the future, structural and institutional rigidities need to be eased in two critical areas:
comprehensive legal support for recovery of bad debts and a fundamental change in the pattern of governance
for the PSBs. While public sector banks are in the process of restructuring, private sector banks are busy
consolidating through mergers and acquisitions (the sector has been recently opened up for Foreign
investments).
PSB’s need to improve in the services like ATM’s, Credit and Debit cards. They lack behind in providing
facilities like loans and other accounts. These branches are not interlinked with each other and working hours
are less. In case of Private sector banks customers are not aware of the facts and hidden costs in view, as there
are various products and facilities provided by the banks. The charges that are been taken are also too high.
Challenges and Opportunities exist for both the public sector as well as the private sector banks, their nature
however differs. From the 11 parameters, we have identified 3 areas of challenges separately for private and
public sector banks.
The Credit Deposit Ratio of Private sector banks is better compared to PSB’s
The Capital Adequacy Ratio of PSB’s is satisfactory compared to that of Private Banks
The Net Profit of PSB’s is better than Private Sector
2.5 7P’s of Banking Sector
Once the strategies have been developed by the banks, there is 7P formula to be used to continually evaluate and
revaluate banking activities. As the products, markets, customers needs change rapidly the organisation should
revisit these 7P’s continually in order achieve the maximum result in the competitive market . It is very
important for any bank to identify the 7 P’s of services so as to understand their customer’s perception and the
demand of the investors better and provide them with best of service (Bitner, 1990). The 7 P’s of banking covers
all the aspect of the bank which helps the investor to identify where to make an investment and its advantage.
1. Product mix
2. Price mix
3. Place
4.Promotion
5.People
6. Process
7. Physical evidence
PRODUCT MIX:
The product mix of a bank includes all different product lines a bank offers to its customers. The product line of
a bank might easily include more than 100 different services. In today’s competitive scenario it has become very
necessary for a bank to provide its customers with a wide variety of services and the best technology in order to
attract them. Private bank is more technological when compared to public bank. So the investors have plenty of
choices in selecting the product of the bank. The investors can analyse and invest according to the offers offered
by their consultant bank. Here is an example of some of the products offered by private Bank to its customers.
Offering: Private Bank's Savings Account is just the right product for everyone, salaried, employees or
businessmen, high net worth individuals and NRI's. The unmatched package of Private Bank Savings Bank
account given below brings the benefits of better, efficient and hassle free banking.
ATM Network: A Savings Bank Account with private Bank entitles you to a free ATM card, which enables you
to access your account anytime and at any ATM centre across the country. You can withdraw and deposit
money and cheques with your ATM card. Unlike most other ATMs, a UTI Bank ATM allows you to withdraw
up to Rs. 20,000 a day. In addition, cash can be withdrawn from any of the ATMs against your MasterCard
(domestic/international).
7-Day Banking: At select branches spread over the country, you can bank on all the 7days of the week (except
for public holidays), over extended working hours.
Telephone banking: Tele-banking service provides you instant access to your account. It offers you a wide
range of services over the phone such as account information, Balance Enquiry, Transaction Details, Statement
of Account, Status of your Cheque, etc.
PRICE MIX:
The price mix in the banking sector is nothing but the interest rates charged by the different banks. In today’s
competitive scenario where customer is the king, the banks have to charge them interest at a rate in accordance
with the RBI directives. Banks also compete in terms of annual fees for services like credit cards, DMAT etc.
With India’s economy progressing, there are more and more buyers seeking these loans but at a very
competitive interest rate. The interest rates will have a great impact on the investors while making the decision
for investment. There may be variation in interest rates according to the accounts. The investor will invest in the
bank where the risk is less. Interest rates play an important role for the investors while making the investment.
The pricing factor is very important because of the kind of competition that is prevailing today in the Indian
market. However it is very important to understand that in the banking sector, the main pricing policy is
concerned with the interest rate charged. This interest rate is however regulated by the RESERVE BANK OF
INDIA and THE INDIANBANKING ASSOCAITION. Any one particular bank or a group of banks does not
regulate it. The interest rate charged cannot be higher than that decide by the RBI and the INDIAN BANKING
ASSOCIATION.
The most favourable pricing strategy
This model shows a pricing strategy, which should be adopted in order to ensure maximum satisfaction to both
the bank as well as the customers. The price should be set in such a manner that the investor should be assured
that he is not being cheated or overcharged by the bank and at the same time the bank and investors are able to
reap maximum profits and returns. Such a pricing helps the bank to attract the investors and customers.
(Davis.T and Hahn.E.F 2003)
PLACE
Place mix is the location analysis for banks branches. There are number of factors affecting the determination of
the location of the branch of bank. It is not necessary that the bank should be situated at a location where most
of its target population is located apart from target population it should also concentrate on the rural and
development areas where the banking facilities are not available. Some of the important factors affecting the
location analysis of banks are the trade area, population characteristics, commercial structure, industrial
structure, banking structure, proximity to other convenient outlets, Real estate outlets, proximity to public
transportation, Drawing time, Location of competition, visibility and access. It is not necessary that all the above
conditions have to be satisfied while selecting the location but it should be tried to satisfy as many of them as
possible.(Gabott.M and Hogg.G 1998 )
PROMOTION:
Promotion is nothing but making the investor more and more aware of the services and benefits provided by the
bank. The banks today can use a lot of new technology to communicate to their investors. Two of the fastest
growing modern tools of communicating with the customers are: internet banking and mobile banking. This can
be better explained in private banks rather than public banks. As the private bank ICICI was first to use the
technology of internet banking and mobile banking.
ICICI was the first organization in India to provide Wireless Application Protocol (WAP) based services.
Mobile commerce using WAP technology, allows secure online access of the web using mobile devices. With
WAP one can directly access the ICICI WAP server, check one’s account details and use other value added
services. Thus different methods are used by different banks to promote its services.
A bank may have very attractive schemes to offer to their investors but they are of no use if they are not
communicated properly to the investors. Promotion is to inform and remind the individuals and persuade them
to accept, recommend or use of product, service or idea. However there some very important points that is to be
considered before the promotion strategy is made. These points are finalising the budget, making possible
creativity, testing the effectiveness. There are different ways of promotion like public selling, Personal selling,
Sales promotion, Internet.(Bonama.V.T and Mills.K.M 1980)
PEOPLE:
People are the employees that are the service providers. In a banking sector, the service provider plays a very
important and determinant role in rendering the customers a satisfactory and a good service. It is extremely
essential that the service provider should understand what the investors expect from them. In the banking sector,
the investor needs to be guided in a lot of matters, like which is the best product to invest in both private and
public sector banks, which is possible only with the help of the service provider.
The position in the eyes of the customer will be perceived by appearance, attitude and behaviour of the customer
contact employees. Not only does the customer contact employee influence the customer’s perception but also
the customer base of the organization does so. (Clow.E.K 2003)
PROCESS:
The process mix constitutes the overall procedure involved in using the services offered by the bank. It is very
necessary that the process is very customer friendly. In other words a process should be such that the investor is
easily able to understand and easy to follow without any hesitation. Today if particular banks formalities are
long and the procedure are very complicated the overall process fails and the investors may switch over to the
other banks. (Rust.T.R 1996)
PHYSICAL EVIDENCE:
Physical evidence is the overall layout of the place i.e. how the entire bank has been designed. Physical evidence
refers to all those factors that help make the process much easier and smoother. For example, in case of a bank,
the physical evidence would be the placement of the customer service executive’s desk, or the location of the
place for depositing cheques. It is very necessary that the place be designed in such a manner so as to ensure
maximum convenience to the customer and cause no confusion to him.(Nargundkar.R 2006)
2.6 The Concept of Perception
Using the sensory receptors and being influenced by external factors, the person receives information, accepts
and adapts it, forms his personal attitude, opinion and motive, which can be defined as factors that will influence
his further activity and behaviour. Perception within this context is considered as one of the principal personal
factors, conditioning the nature and direction of remaining variables.
J. C. Mowen (1987) determine perception as a phase of information processing, while C. G. Walters (2000),
define behaviour having features of the process and including separate phases of the process. C.G. Walters
(2001) characterize perception as a solid process during which an individual acquires knowledge about the
environment and interprets the information according to his/her needs requirements and attitudes. The works B.
Dubois (2000) present perception as a more complicated process, during which sensory receptors of a consumer
capture a message sent by external signals and the information received is interpreted, organized and saved,
providing a meaning for it and using it in a decision making process.
2.7 Customer Perception
Customer perception is an important component of maintaining relationship with the customers. Customer
satisfaction is a mental state which results from the customer’s comparison of expectations prior to a purchase
with performance perceptions after a purchase. A customer may make such comparisons for each part of an
offer called ‘‘domain-specific satisfaction’’ or for the offer in total called ‘‘global satisfaction’’ .Moreover, this
mental state, which they view as a cognitive judgment, is conceived of as falling somewhere on a bipolar
continuum bounded at the lower end by a low level of satisfaction where expectations exceed performance
perceptions and at the higher end by a high level of satisfaction where performance perceptions exceed
expectations.
Customers are the core focus of any organization and thus of prime importance to the banks. It is important for
the service providers to know the level of customer expectations so that they can meet and even exceed them to
gain maximum customer satisfaction. Hence understanding customer expectations is a prerequisite for
delivering superior service (Parasuraman et al., 1991). Service sector can provide the best services to their
utmost capabilities but if the customer does not perceive them to be of quality, all is in vain. Thus it is very
essential for the service provider to understand how customers can perceive the service as quality service and
carry a euphoric feeling. It is the task of the marketing people to understand the factors affecting customer
perception, elements of service quality and satisfaction to have a competitive edge and to create a perceptual
difference. If all these are considered and then the service provider targets the customers with a total service
experience, the customer perceives the service as quality service and spreads positive word of mouth. Thus
perception is one of the factors affecting customer satisfaction. (Zeithaml and Bitner, 2003)
Services are a series of activities and as the "product" is "missing" (Gronroos, 1998) the service quality forms an
important aspect in the perception of services as it has both marketing and operations orientations (Fitzsimmons
and Fitzsimmons, 2001). It can be used as a tool for differentiation and can provide a competitive edge. Service
quality is also crucial for developing loyal customers and is hence responsible for the success of any service
organization (Kandampully, 1998; 2000). The customers at the time of service delivery interact closely with the
service providers and get an inside knowledge of the service organization. This knowledge gives them an
opportunity to critically assess the service provided and the service provider. Thus service quality plays an
important role in adding value to the overall service experience. Also customers seek organizations that are
service loyal i.e. aim to provide consistent and superior quality of service for present and long term and
organizations aiming for this are bound to get customers' loyalty (Kandampully, 1998).
It is necessary for both the banks that they should understand the customer perceptions in order to retain the
customers. Due to competitive market the investors are attracted by the banks where they get the better returns.
With better understanding of customers' perceptions, banks can determine the actions required to meet the
customer needs. They can identify their own strengths and weaknesses, where they stand in comparison to their
competitors, chart out path future progress and improvement. Customer satisfaction measurement helps to
promote an increased focus on customer outcomes and stimulate improvements in the work practices and
processes used within the banks. ( Bhaskar Rao,2007)
2.8 INVESTMENT:
Investment is a form of saving in which an individual’s money can potentially generate a return. This return can
be in the form of income (like interest or dividends) or appreciation of the value of the lump sum invested.
Investment involves two key variables: ‘Risk’ and ‘Return’. The objective of successful investing is to
maximise the returns you can get for the level of risk you are prepared to take.(Ramsey.D 2004).
2.9 Investment Theory
The concept of investment theory is based on the consideration of number of factors which are associated with
the process of investing. The theory focuses on looking closely towards wide range of factors which guide in
choosing the right investments for particular goal or purpose. While there are approaches to investment theory
which involves employing a number of other theories as a part of the process, some economist breakdown the
task into four areas that just about anyone can grasp.
The first key factor is about the goals for the investment portfolio. The idea is to protect the investor from
downturns in one market by providing for upswings in value with other holdings by determining, how to
diversify the portfolio while still balancing that diversification with the type of individual securities,. It is known
as modern portfolio theory, this factor is key to the investment process for investors who have specific goals for
the income generated by the portfolio.
Another important aspect is based on evaluating investments based on the degree of risk and potential return.
The idea is to help the investor focus on options that carry an acceptable amount of risk while providing the
greatest amount of return. This element is the basis for the capital asset pricing model, and can make a big
difference in whether or not an investor makes the right choices for his or her portfolio. A similar approach,
known as the arbitrage pricing theory, focuses more on assessing the degree of risk associated with a
given investment option, but still serves the purpose of helping an investor decide if the potential return is worth
the volatility assosciated with a given option.
A well-crafted investment theory will also consider the amount of information available about both
the investment option and the general condition of the market or markets where the option is traded. It is known
as the efficient market hypothesis, this concept holds that all information that is relevant to making the decision
to hold, buy, or sell an option must be readily available to the investor in order for the market to be truly
efficient. Since knowing the past history, the current status, and the potential future risks associated with
any investment is key to being able to make wise choices, the investor should determine if this situation of an
efficient market exists before deciding to get involved with a given investment.
Essentially, an investment theory is all about making informed investment decisions. By taking into
consideration the goals and aims of the investor, it is possible to build a portfolio that will help meet those goals.
In order to wisely choose the right investments, it is important to know all there is to know about
the investment and the market in which it is traded. Developing an investment theory that encompasses all these
factors will greatly increase the chances for success, as well as aid the investor in avoiding investment options
that are not in his or her best interest.(Evenskey.H and Katez D.B 2002)
2.10 Factors involved in investment decision:
The main motive behind the investments is to make money and increase the monetary wealth. With so many
factors involved, investment decision is a complex. Small investors often go with more returns and less risky
when trying to choose among numerous alternatives to invest in Public banks or private banks. Big investors use
various analyzing techniques. Globalization and the growth of internet have introduced many new opportunities
and threats. When investing, investors are committing their assets for some time, that is why the investor need to
cover all aspects before making an investment decision (William.K,2007)
Expected Return:The most basic decisions in making investment revolve around the comparison of expected
return and risk involved.An investor will not likely to take higher risk if there is no chance of higher returns is
not equal. Investors strive to reach on the best trade-off point between risk and return which go well with their
financial requirements. These expected returns are not always equal to what an investor actually gets after some
time. The possibility that actual return will not be the same what they expect is called risk.
Risk Factor: it is rare to make investment which doesn't involve risk. Government securities come close to be
called risk free; but still have some risks attached. Risk actually is the balancing factor of the financial markets.
Various types of investment risk exist, such as financial risk, currency risk, inflation risk or capital risk are the
most common one. Different investors react differently to these risks. While majority of the investors are risk
averse, there are some investors who are seeking more risky ones with expectations of higher yields.
Investor's Hunch: Every investor will finish off with a different conclusion although the market, economy and
all statistical facts and figures are same for everyone. This difference comes from the investor's intuition. Some
will start from research; by collecting lots of information and then analyzing to decide, others start from
defining their objectives and then going for opportunities that suit their needs (William k,2007)
Globalization Factor: Investors have slowly started to realize the advantages of international investments. Some
banks present better returns while other banks provide lesser risks. Investors have often conquered risk by
diversification, and an international market provides more opportunities to achieve portfolio diversification as
compared to a local market. Ignoring global markets for investment is turning your back on a whole new world
of opportunities.(William.K,2007)
Investment risk pyramid - An investment pyramid represents three levels of investment. At the bottom of the
pyramid, low risk investment options are placed. In the middle portion of the pyramid, the investment options
have a greater risk associated with them. However, these investment options can give you better financial
returns than the extremely low risk ones. The third and the topmost portion consist of extremely high risk
investment options. Though the profit from such investments can be unbelievable, you also stand at a high risk
of losing your money due to volatile market conditions and overall nature of the economy. The low risk options
which form the base of the pyramid can include bank accounts such as fixed deposits and savings accounts,
government bonds and debt instruments, cash, pension funds, money market accounts, treasury bills, notes, and
bills. The middle level of the investment pyramid consists of more risky investment options such as real estate
investment, equities, mutual funds, direct stock investments, and some high income bonds. The most risky and
high rewarding options such as options, futures, collectibles, penny, and speculative stocks are placed at the top
of the investment risk pyramid. As we move up the pyramid, our risk goes on increasing and so does our
reward. You should think of what return on investment you will get before taking any investment decision. In
the next paragraph, let us understand how to make use of the investment risk pyramid to make a personal
investment portfolio. (Hopkins R.B and Blazek.J 2003).
INVESTING IN BANKS AND THEIR MOTIVES:
There are many ways to increase your income by investing savings and spending money wisely. If you have
started to set aside money, you may want to find a financial advisor to help you make financial decisions. This
may be a trusted friend or relative who handles their own money successfully, someone at a bank or financial
institute whom you trust, or a lawyer or stockbroker at a reliable company. Whomever you choose, be sure they
have a good reputation, are trustworthy, make you feel comfortable, can clearly show how they are handling
your money and what (if anything) they are charging you for. Above all, be sure that you keep control over your
money! Your advisor may make suggestions about how to handle your money, but you should know what is
happening to your money and make all final decisions (including deciding not to let the person handle your
money anymore if you aren't happy.)There are many ways to invest and spend money wisely. Below is a list of
some of the more common method used by the investors while investing in banks
Savings Accounts - As mentioned in other sections in this course, savings accounts are an easy way to make
your money work for you by earning interest. Talk to local banks about the different types of savings accounts
they have and what type of interest they offer.
CDs (Certificates of Deposit) - Many banks often offer Certificates of Deposit or CDs to their customers. The
advantage of CDs is that they usually give you a higher interest rate on your money than savings accounts. The
disadvantage is that you usually have to commit a certain amount of money (anywhere from 100 to thousands)
for a certain amount of time (anywhere from 6 months to several years) to earn that higher interest. While you
can have access to your money in case of an emergency, you usually lose the interest you are earning, so when
purchasing a CD, you want to be sure you can commit to the full length of time.