Introduction - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/37526/3/c1.pdf · Introduction...
Transcript of Introduction - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/37526/3/c1.pdf · Introduction...
Chapter I
Introduction
In India, the banking industry has undergone drastic changes
after liberalization and globalization measures undertaken since
1991. In Indian banking industry, which is one of the largest in
the world today, there has been a great surge in efficient customer
service. A highly satisfied and delighted customer is an important
non-financial asset for the banks in the emerging information
technology era. But due to increased competition in retail banking
sector, the banks are in need of formulating a strategy to compete
effectively with others.
In recent times, particularly after globalization, as in the past,
banks largely pursued undifferentiated marketing that was aimed
at a broad spectrum of customers rather than particular
segments. Making a full range of services available to all
customers and development of the one-stop financial centre is an
attractive strategy. At the same time, quality of service is of much
importance for a bank to attract new customers and retain the
existing customers in its fold. In any bank, customers would
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continue their transactions only if they are satisfied with service
quality.
Service quality is a very important component in any business
related activity without any doubt. This is especially so, to a
marketer, to whom a customer’s evaluation of service quality and
the resulting level of satisfaction are perceived to affect bottom
line measures of business success, including customer loyalty�.
According to the service quality theory, it is predicted that
customers will judge that quality as ‘low’ if performance does not
meet their expectations and quality as ‘high’ when performance
exceeds expectations. Closing this gap might require toning down
the expectations or heightening the perception of what has
actually been received by the customer�.
Customer satisfaction and perceived service quality are inter-
related. The higher the perceived service quality, higher is the
customer satisfaction. Many agree that in the banking sector,
there are no recognized standard scales to measure the perceived � Lacobucci, D., Grayson, K., and Ostrom, A. 1994. “The Calculus of
Service Quality and Customer Satisfaction: Theoretical and Empirical Differentiation and Integration. In Lacobucci, D. and Ostrom, A. (Eds). 1995. Distinguishing Service Quality and Customer Satisfaction: The Voice of the Consumer, Journal of Consumer Psychology, 4(3), pp.277-203 �
Parasuraman, A., Berry, L., and Zeithaml, V. 1985. “A Conceptual Model
of Service Quality and Its implications for Future Research.” Journal of Marketing, 49, pp.41-50.
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quality of a bank service. Thus, competitive advantage through
high quality service is an increasingly important weapon to
survive. Therefore, this study investigates service quality
attributes along with a measure of perceived customer satisfaction
to determine the direct and indirect effect on bank customers’
loyalty. Further, the study seeks to identify the most important
attributes / cues in retail banking, which may be used to review
characteristics of the banks as experienced by customers.
1.1 Retail Banking
Retail banking in India has fast emerged as one of the major
drivers of the overall banking industry and has witnessed
enormous growth in the recent past. Retail banking refers to the
provision of banking services to individuals and small businesses
where in the financial institutions are dealing with a number of
low value transactions. This is in contrast to wholesale banking
where the customers are large, often multinational companies,
governments and government enterprises and financial
institutions deal in small number of high value transactions.
Retail banking is a banking service that is geared primarily
towards individual consumers. This concept is not new to the
banks but is now viewed as an important and attractive market
segment that offers opportunities for growth and profits.
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Retail banking is usually made available by commercial
banks, as well as smaller community banks. Unlike wholesale
banking, retail banking focuses strictly on consumer markets.
Retail banking is typical mass-market banking where individual
customers use local branches of larger commercial banks. The
term “Retail Banking” encompasses various financial products
viz., different types of deposit accounts, housing, consumer, auto
and other types of loan accounts, demat facilities, insurance,
mutual funds, credit and debit cards, ATMs and other technology-
based services, stock-broking, payment of utility bills, reservation
of railway tickets, etc. It caters to diverse customer groups and
offers a host of financial services, mostly to individuals. It takes
care of the diverse banking needs of an individual. Retail banking
is a system of providing soft loans to the general public like family
loans, house loans, personal loans, loans against property, car
loans, auto loans, etc. The products are backed by world-class
service standards and delivered to the customers through the
growing branch network, as well as through alternative delivery
channels like ATMs, Phone Banking, Net Banking and Mobile
Banking. Customers and small businesses get benefited from
increased credit access, speedy and objective credit decisions,
whereas lenders get benefited from increased consistency and
compliance.
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Retail banking and retail lending are often used as synonyms
but in fact, the latter is just part of retail banking. In retail
banking all the needs of individual customers are taken care of in
a well-integrated manner. Retail banking is, however, quite broad
in nature. It refers to the dealing of commercial banks with
individual customers, both on liabilities and assets sides of the
balance sheet. The retail banking environment today is changing
fast. The changing customer demographics demand to create a
differentiated application based on scalable technology, improved
service and banking convenience. Higher penetration of
technology and increase in global literacy levels have set up the
expectations of the customers higher than never before.
Increasing use of modern technology has further enhanced reach
and accessibility.
The market posed various challenges to provide multiple and
innovative contemporary services to the customers through a
consolidated window so as to ensure that the bank’s customers
get “uniformity and consistency” of service delivery across time
and at every touch point across all channels. The pact of
innovation is accelerating and security threat has become the
prime factor of all electronic transactions. High cost structure
rendering mass market servicing is prohibitively expensive. So,
retail banking industry to be successful their service quality is
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important for the banks to grow and increase the loyal and
satisfied customer base. Present day tech savvy bankers are more
looking at reduction in their operating costs by adopting scalable
and secure technology thereby reducing the response time to their
customers so as to improve their client base and economies of
scale. It is not possible for any bank to grow just by reduction of
their operating cost but it is possible only by way of quality of
services provided to the expectation and satisfaction of the
customers. The customers are loyal to their banks only if the
banks offer quality services up to their expectations. Hence, the
present study is undertaken to explore various aspects underlying
service quality and its impact on customer loyalty and customer
satisfactions in retail banking.
1.2 Retail Banking in India
With a jump in the Indian economy from a manufacturing
sector, that never really took off, to a nascent service sector,
banking as a whole is undergoing a change. A larger option for the
consumer is getting translated into a larger demand for financial
products and customisation of services is fast becoming the norm
than a competitive advantage. In India, the retail banking sector
is expected to grow at a rate of 30 per cent every year and
therefore, bankers are focussing more and more on the retail and
are waking up to the potential of this sector of banking. The
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reasons behind the euphemism in focussing on retail customers
among Indian banks is that the banks have now felt the
worthiness of retail banking with adoption of technology
innovation in helping them earn more and grow a lot.
The Indian players are bullish on the retail business and this
is not totally unfounded. This is because the face of the Indian
consumer is changing as it is reflected in a change in the urban
household income pattern. The direct effect of these changes will
be on the consumption patterns and the banking habits of
Indians will now be skewed towards retail products. At the same
time, India is pretty poor when compared with the economies of
the world in terms of spending patterns even after the opening up
of Indian economy at the global level. This can be seen from total
outstanding retail loan in India. While the total outstanding retail
loan in Taiwan is around 41 per cent of GDP, the figure in India
stands is at less than 5 per cent�. The comparison with the West
is even more staggering. Another comparison that is natural when
comparing retail sectors is the use of credit cards.
Going by international standards, a large portion of the
Indian population is simply not “bankable” – taking profitability
into consideration. On the other hand, the financial services � Banking in India, Economic News, Feb. 10, 2010.
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market is highly over-leveraged in India. Competition is fierce,
particularly from local private banks such as HDFC and ICICI, in
the business of home, car and consumer loans. Although the
players are spreading their operations into segments like self-
employed and the semi-urban rich, it is an open secret that the
big city Indian yuppies form the most profitable segment. Over-
dependence on this segment is bound to bring in inflexibility in
the business.
On the other hand, the foreign banks in India have identified
pros and cons of the retail banking, but there are certain
systematic risks involved in operating in the retail market for
them. These include regulatory restrictions that prevent them
from expanding their branch network. So these banks often take
the Direct Selling Agent (DSA) route whereby low-end jobs like
sourcing or transaction processing are outsourced to small
regional players. The spend-now-pay-later “credit culture” in India
is just not picking up. Swift legal procedure against consumers
creating bad debt is virtually non-existent. Finally, the vast
geographical and cultural diversity of the country makes credit
policy formulation a tough job and it simply cannot be dictated
from a Wall Street or a Singapore boardroom! All these add up to
the unattractiveness of the Indian retail market to the foreign
players.
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So over the past few years, in spite of the entry of MNCs in
many industries, retail banking has seen a flurry of panicky exits.
Fewer than 40 remain in India and their share of total bank
assets which is currently 7.2 per cent is falling�. Those that
remain might be thought to be likely buyers of Indian banks. Yet
Citibank, HSBC and Standard Chartered—all in India for more
than a century and with relatively large retail networks—seem to
have no pressing need to acquire a local bank. Established foreign
banks have preferred to take over customers or businesses from
other foreign banks that want to leave.
A growing market can never be an alibi for lack of innovation.
Indian banks have shown little or no interest in innovative tailor-
made products. They have often tried to copy process designs that
have been tested, albeit successfully, in the West. Each economic
culture has its own traits and one who successfully adapts those
to the business is the eventual winner. Positioning a bank as a
tech-savvy financial vendor in a country where internet
penetration is an abysmal, 1.65 per cent can only add to the over-
leveraging.
The focus of the sector should remain in macroeconomic
wealth creation and not increasing the per capita indebtedness � Banking in India, Economic News, Feb. 10, 2010.
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that will do little but add to the NPA burden. Retail banking in
India has to be developed in the Indian way, notwithstanding the
long queues in front of the teller counters in the Public sector
banks. Today’s retail banking sector can be characterized by three
basic characteristics: (a) multiple products (deposits, credit cards,
insurance, investments and securities); (b) multiple channels of
distribution (call centre, branch, internet and kiosk); and
(c) multiple customer groups (consumer, small business and
corporate). The objective of retail banking is to provide customers
a full range of financial products and banking services and give
the customers a one-stop window for all their banking
requirements. Retail banking segment in Indian banking sector is
continuously undergoing innovations, product re-engineering,
adjustments and alignments.
Now-a-days, changes in consumer demographics have led to
the need for expansion of retail banking activities in India which
are:
Increasingly affluent and swollen middle class: About 320 million
people will be added to the middle-income group in a period of 15
years approximately. � � � � � � � � � � � � � � � � � � � � � � � � Changing consumer
demographics indicate vast potential for growth in consumption
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both qualitatively and quantitatively, due to sustained growth in
middle class and youngest people in the world. 70 per cent of
Indian population is below 35 years of age which means that
there is tremendous opportunity of 130 million people being
added to working population. � � � � � � � � � � � � � � � �The increase in the literacy ratio has led
the people to get the taste for latest technology and variety of
products and services. This will lead to greater demand for retail
activities specially retail banking activities. � � � � � � � � � � � � � � � � � � � � � � � � � �Convenience banking in the form
of debit cards, internet and phone-banking, anywhere and
anytime banking has attracted many new customers into the
banking field. Technological innovations relating to increasing use
of credit / debit card, ATMs, direct debits and phone banking
have contributed to the growth of retail banking in India. � � � � � � � � � � � � � � � � � � � � � � � � � � � � �Urbanization of Indian
population is also an important feature influencing the retail
banking. � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � Economic prosperity
and the consequent increase in purchasing power have given a
fillip to a consumer boom. During the 10 years after 1992, India’s
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economy grew at an average rate of 6.8 percent and continues to
grow at the almost the same rate – not many countries in the
world match this performance� . It means that Indian consumers
are now shifting from the tendency of buying more and better
quality to new services and products. � � � � � � � � � � � � � � � � � � � � � � � � ! �The treasury income of the
banks, which had strengthened the bottom lines of banks for the
past few years, has been on the decline during the last two years" . In such a scenario, retail business provides a good vehicle of
profit maximisation. Considering the fact that retail’s share in
impaired assets is far lower than the overall bank loans and
advances, retail loans have put comparatively less provisioning
burden on banks apart from diversifying their income streams. � � � � � � � � � � � � � � Finally, decline in interest rates has also
contributed to the growth of retail credit by generating the
demand for such credit.
1.3 Service Quality
Service quality is an approach to manage business processes
in order to ensure full satisfaction of the customers which will � Retail Lending Balancing Concerns in different times, Indian Bankers
Association – Finsight Special Report, Feb. 2009. " Shyamala Gopinath, Deputy Governer, Keynote Speech at the IBA –
Banking Frontiers International Conference on “Retail Banking Directions and Challenges” on May 28, 2005 in Mumbai.
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help to increase competitiveness and effectiveness of the industry.
Quality in service is very important especially for the growth and
development of service sector business enterprises (Powell, 1995)# . With the increase in the importance of service sector in the
economy of India, the measurement of service quality became
important now-a-days in the research circle. The key strategy for
the success and survival of any business institution is the
deliverance of quality services to customers. The quality of
services offered will determine customer satisfaction and
attitudinal loyalty (Ravichandran et al. 2010)$ . The inter-relationships
of variables defining the antecedents and also the consequences of
customer satisfaction have been studied extensively in the
consumer research literature.
The world economy is rapidly becoming service-oriented now-
a-days due to economy liberalization all over the world. The
unique characteristic of services (more precisely, service elements
in products) is that they are processes and not tangible things
# Powell, T C (1995), “Total Quality Management as Competitive Advantage:
A Review and Empirical Study”, Strategic Management Journal, Vol. 16,
pp. 15-37. $ Ravichandran, K. Prabhakaran, S. and Kumar, S.A. (2010), “Application
of Servqual Model on Measuring Service Quality: A Bayesian Approach”, Enterprise Risk Management, Vol. 1, No. 1, pp.E9.
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(Grönroos 2001) % . This characteristic is at the root of all other
service elements characteristics. The fundamentals of theory on
service quality originate from the literature on product quality and
customer satisfaction. So, perceived service quality is the result of
customers’ subjective judgment of the level of service offering and
its delivery.
There are five consistent attributes of perceived quality across
the service industries, namely reliability, responsiveness,
assurance, empathy and tangibles (Parasuraman et al. 1988)� &
.
Though researchers agree that perceived service quality is a
multi-dimensional construct, no consensus has been reached
about its generally valid, generic dimensions. As researchers
continue to debate the determinants of service quality, a few
important issues remain unanswered e.g., (a) the universality of
service quality determinants across a section of services; (b) the
importance and nature of operating characteristics of
determinants as they together constitute the service quality;
(c) whether the service characteristics get reflected in what
% Grönroos, C. (2001). Service management and marketing: A Customer
Relationship Management Approach. New York: Wiley. � & Parasuraman, A., Zeithaml V. A., Berry L.L., (1988). “Service Quality: A
multiple-item scale for measuring consumer perceptions of service quality,” Journal of Retailing, Vol. 64, No. 1, pp.12-40.
15
customers expect out of delivery of a particular service (Pal and
Choudhury, 2009)� �
.
Without any doubt, service quality is a very important
component in any business-related activity. Particularly to a
marketer, customers’ evaluation of service quality and the
resulting level of satisfaction are perceived to affect bottom line
measures of business success. Customer expectations are beliefs
about a service that serve as standards against which service
performance is judged; which customer thinks a service provider
should offer, rather than on what might be on offer (Parasuram et
al., 1988)� �
. Service quality can also be defined as the difference
between customer’s expectations for the service encounter and
the perceptions of the service received.
According to the service quality theory (Oliver, 1980)� �
, it is
predicted that customers will judge that quality as ‘low’ if
performance does not meet their expectations and quality as ‘high’
when performance exceeds expectations. The perceived quality of � � Pal, M. N., and K. Choudhury. (2009). “Exploring the dimensionality of
service quality: an application of topsis in the Indian banking industry”. Asia-Pacific Journal of Operational Research, Vol.26, No.1, pp.115–34. � �
Parasuraman, A., Zeithaml V. A., Berry L. L., (1988). “Service Quality: A
multiple-item scale for measuring consumer perceptions of service quality,” Journal of Retailing, Vol. 64, No. 1, pp.12-40. � �
Oliver, R.L. (1980), “A cognitive Model of the antrecedents and
Consequences of Satisfaction Decisions”, Journal of Marketing Research,
Vol. 17, pp.460-469.
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a given service is the result of an evaluation process since
consumers often make comparison between the services they
expect with perceptions of the services that they receive and the
quality of service is dependent on two variables namely expected
service and perceived service (Gronroos, 1982)� �
.
As perceived service quality plays important roles in
industries with high customer involvement, particularly in the
banking industry, it is important to identify dimensions of these
perceived service quality constructs correctly and to find out how
the constructs are perceived by customers (Glaveli et al. 2006)� � .
Several research projects concerning the relationship between
perceived quality and customer satisfaction and loyalty have been
conducted, although the majority have been implemented in
developed economies, like the one in US, not in the developing
economy like one in India.
1.4 Service Quality in Retail Banking
Service quality has become an important factor among the
customers in retail banking. For the success and survival in the � � Gronroos, C. (1982), “Strategic Management and Marketing in the Service
Sector”, Swedish School of Economics and Business Administration,
Helsingfors. � � Glaveli, N., E. Petridou, C. Liassides, and C. Spathis. (2006). “Bank
service quality: Evidence from five Balkan countries”. Managing Service
Quality, Vol.16, No.4, pp.380–94.
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banking sector, provision of high service quality is necessary in
meeting several requirements such as customer satisfaction and
customer loyalty, to attract new customers and to increase the
market share and profitability. Service quality is consistently
viewed as a unique construct from customer satisfaction. The
consumer considers that the service quality stems from a
comparison of what he feels about the service and what is the
performance of that service offering.
Service quality has become a principal competitive weapon in
the banking industry. Services are intangible and are also not
easily duplicated. Quality on the other hand, is differentiable and
stems from the expectations of the customers, Hence, it is
necessary to identify and prioritize the customers’ expectations for
service quality and incorporate these expectations into a service
process for improving quality. The key variables in meeting
customer expectations begin with identifying the specific
characteristics of service quality as perceived by the customer
who defines the nature and importance of service quality.
Among the service industry, the banking sector is perhaps the
largest one that caters to the needs of people belonging to all
sections of society. Moreover, perceived service quality tends to
play a significant role in high involvement (high interaction
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between customers and service providers) industry like banks
(Angur et al., 1999)� " . Also, banks traditionally have long term
business relationships with customers. In addition, the banking
sector is large enough to capture and represent almost all the
critical features of customer-perceived service quality and the
critical dimensions of TQS (Total Quality Service) that the
management may have to encounter in order to manage a service
organization effectively.
To be successful in the industry and achieve sustained
growth, the banks need to understand the service attributes that
are used by consumers in selecting banks. For example,
consumers would use bank reputation, bank reliability, bank
assurance and physical facilities of the bank in selecting bank
services. If marketers can understand which one or many of these
attributes are used to evaluate a service, they will be better able to
manage and influence the customers’ evaluations and perception
of the offering.
Moreover, perceived quality of service tends to play an
important role in high involvement industries like banking
services. Banks have traditionally placed a high value on
16 Angur, M.G., R. and Jahera, J.S. Jr., “Service Quality in the Banking
Industry: An Assessment in a Developing Economy,” The International Journal of Bank Marketing, Vol.17, No.3, (1999) pp.116-123.
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customer relationships with both commercial and retail
customers. In the last ten years, the nature of customer
relationships in retail banking has been changing, especially since
the advent of automatic teller machines and internet banking.
1.5 Customer Loyalty
The customer loyalty is customer’s demonstration of faithful
adherence to an institution (or merchant) despite the occasional
error or indifferent service. As the definition implies, having
entered into a business relationship with a financial services
institution, the customer maintains and continues the
relationship. In this view, customer loyalty is an attitude or
behaviour that customers explicitly vocalize or exhibit.
Over the decades, banking environment has changed
dramatically due to structural and technological factors as well as
due to periodical changes in the policy regulations of the
government. In increasingly competitive market, service quality is
a critical measure of organizational performance which continues
to compel the attention of banking institutions and remains at the
forefront of services marketing literature and practice. As high
service quality results in customer satisfaction and customer
loyalty, greater willingness of the customers to recommend to
someone else, reduction in complaints and improved customer
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retention rates, the banks are interested in providing quality
service to their customers.
Customer loyalty continues to be the bane of retail bankers’
existence. Over the last decades, bankers have experimented with
a multitude of programs and tactics to strengthen customers’
bonds of loyalty to their institutions. Throughout this period,
perhaps the most frustrating challenges for retail bankers have
been designing programs that have a discernible impact on
loyalty, determining an appropriate level of rewards and devising
standards and metrics for measuring loyalty. Many retail banks
have explored the path of least resistance, limiting their loyalty
efforts to product-specific programs or simple date-based
recognition programs. If the status of customer loyalty programs
found within retail banks today is examined, one will argue that
retail bankers need to be more creative if loyalty between
customers and the bank is to be a cornerstone of a strong,
profitable relationship.
To create loyalty among the customers, most of the bankers
have introduced the “customer loyalty program” which is typically
of product-oriented programs such as those that reward
customers for using a particular product or service. It such
product-centric programs have been successful in promoting
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loyalty to products, they are not necessarily the most effective
method of fostering customers’ loyalty to their banks. So, retail
banks that desire to build relationships with customers that go
beyond a single product need to focus on loyalty programs that
are relationship oriented.
1.6 Customer Loyalty in Retail Banking
For many bankers, customer loyalty is truly a nebulous
concept. The reason, why so many bankers struggle with
developing, deploying and measuring customer loyalty programs
is that, there is little agreement among bankers as to what
behaviour constitute customer loyalty and how best to encourage
these behaviour. The lack of agreement among bankers as to what
constitutes customer loyalty renders the discussion of customer
loyalty programs cloudy and often unproductive. Further
complicating the discussion is the fact that too many retail
bankers still confuse customer loyalty with two distinct, yet
closely related concepts: customer satisfaction and customer
retention.
Retail banks are often guilty of mistaking customer inertia for
loyalty. Customers who remain in a long-term relationship with a
banking institution while holding the bank in relatively low
esteem are merely trapped, not loyal. The challenge for the bank
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is in understanding the degree of loyalty that exists among
customers and designing loyalty programs that can address the
loyalty gaps. In the interests of building healthy, long-term,
mutually profitable and satisfying relationships, bankers need to
understand the connection between retention and satisfaction
and how they interact to foster customer loyalty.
1.7 Customer Satisfaction
Customer satisfaction is actually a term most widely used in
the business, commerce and industry. It is a business term
explaining about a measurement of the kind of products and
services provided by a company to meet its customers’
expectation. Customer satisfaction has been said to be one of the
most widely used concepts in the area of marketing research.
Customer satisfaction is a measure of how products and services
supplied by a company meet or surpass customer expectation. It
is seen as a key performance indicator within business.
Importance of customer satisfaction in today’s dynamic corporate
environment is obvious as it greatly influences customers’ loyalty.
In a competitive marketplace where businesses compete for
customers, customer satisfaction is seen as a key differentiator and
increasingly it has become a key element of business strategy.
Organizations are increasingly interested in retaining existing
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customers while targeting non-customers. They keep measuring
customer satisfaction as it provides an indication of how successful
the organization is at providing products and/or services to the
marketplace. In order to achieve customer satisfaction,
organizations must be able to build and maintain long lasting
relationships with customers through satisfying various customer
needs and demands which resultantly motivate them to continue
to do business with the organization on on-going basis.
Customer satisfaction is an ambiguous and abstract concept
and the actual manifestation of the state of satisfaction varies
from person to person and one product/service to other product /
service. The state of satisfaction depends on a number of both
psychological and physical variables which correlate with
satisfaction behaviours such as return and recommend rate. The
level of satisfaction can also vary depending on other options the
customer may have and other products against which the
customer can compare the organization’s products.
Customer-centred companies have emphasized a better
understanding of customers’ needs and wants and then
translated them into the capability to give customers what they
really need and want. Simply stated, customer satisfaction is
essential for corporate survival or existence. As customer
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satisfaction is perceived as the result of a cognitive and affective
evaluation, some standard (expected performance) is compared to
the actually perceived performance. If the perceived performance
is less than expected, customers will be dissatisfied. On the other
hand, if the perceived performance exceeds expectations,
customers will be satisfied. Otherwise, if the perceived
expectations are met with performance, customers are in an
indifferent or neural stage. In general, increased customer
satisfaction leads to higher customer retention rate, increases
customer repurchase behaviour and ultimately drives higher firm
profitability. Customers’ satisfaction with a company’s products or
services is often seen as the key to a company’s success and long-
term competitiveness.
1.8 Customer Satisfaction and Customer Loyalty
In India, the modernization of banking process is significantly
affected by the globalization process because the liberalization of
financial market as part of globalization process caused an
increased competition in the banking industry. To survive in a
competitive struggle, banks should offer their customers
something new and relatively cheap services, because the
competitive power of a bank is largely defined by the degree of its
conformance to customer needs. In the information age,
organizations require new capabilities for competitive success,
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such as customer relationships, product innovation, customized
products, employee skills, motivation and information technology.
The adoption and implementation of the marketing concept by
banking institutions have been slow but profitable in many
countries while in many others they are still product-oriented.
Nevertheless, the traditional product-oriented banks are becoming
increasingly customer-oriented focusing more and more on
customer loyalty. In retail banking the quality of the banking
products and the value of customer associated service (a package
of experiences and expectations that get mixed together in the
bank customer’s mind) are at a premium and more and more
banking institutions are recognizing the importance of value-
added products and consumer relationships grounded on loyalty.
Further, maintaining bank’s existing customer base is even more
important than the ability to capture new clients because the cost
of attracting a new customer is much higher than the cost of
keeping the existing one. Thus, customer satisfaction and loyalty
are essential to bank’s success and customer loyalty is a major
contribution to sustainable profit growth.
The abolition of restrictions for foreign financial institutions’
entrance into domestic banking markets after financial market
liberalization due to globalization exacerbates a competition in the
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banking industry. Growing customers’ expectations and, as
consequence, an increase of cost of customer acquisition are the
main problems in modern retail banking. According to E. Deming,
business guru of the past century, a consumer is the most
important element in the production chain. A consumer is more
important than the raw material. It is easier to change supplier
than to find a new consumer (as cited in Neave, 2007)� # . But for
the banks, customers are consumers and suppliers at the same
time because the money deposited by the customer into the bank
is raw material that will be further transformed into other
financial assets (Damodaran, 2007)� $ . Thus, it is doubly important
for banks to retain profitable clients and to intensify the return
from the existing customer base. Unless services provided by the
banks are up to the expectation of the customers (clients), the
profitable clients will not get satisfied and subsequently they will
not be loyal to the bank. That is, customer loyalty is mainly based
on customer satisfaction.
� # Neave, H.R. (2007). The Deming Dimension. Russian Ed. Moscow: Alpina
Business Books, p.370. � $ Damodaran, A. (2007). Investment Valuation: Tools and Techniques for
Determining the Value of Any Asset. 4th Russian Ed. Valuing financial
service firms (pp. 766 – 809). Moscow: Alpina Business Books.
27
1.9 Current Banking Structure ' ( Banks in India can be categorized into Scheduled and Non-
scheduled banks. Scheduled banks in India constitute those
banks, which have been included in the Second Schedule of
Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only
those banks in this schedule which satisfy the criteria laid down
vide section 42(6)(a) of the Act. As on 30th June 1999, there were
300 scheduled banks in India having a total network of 64,918
branches. The scheduled commercial banks in India comprise
State bank of India and its associates (8), nationalized banks (19),
foreign banks (45), private sector banks (32), co-operative banks
and regional rural banks
“Non-scheduled bank in India means a banking company as
defined in clause (c) of section 5 of the Banking Regulation Act,
1949 (10 of 1949), which is not a scheduled bank”. Banks in India
can also be classified in a different way:
Public Sector Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks (RRBs)) * Recent History of Indian Banking at http: // www.
bankingindiaupdate.com/ general.html
28
The above mentioned classification overlaps with the previous
one. Public Sector, Private Sector and Foreign Banks fall under
the category of scheduled banks. Currently, India has 88
scheduled commercial banks (SCBs), 27 public sector banks (that
is with the Government of India holding a stake), 31 private banks
(these do not have government stake; they may be publicly listed
and traded on stock exchanges) and 38 foreign banks. They have
a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public
sector banks hold over 75 per cent of total assets of the banking
industry, with the private and foreign banks holding 18.2 per
cent+ , and 6.5 per cent respectively.
+ , Rajesh, R and T. Sivagnanasith, Banking Theory Law and Practice, Tata
McGraw Hill, New Delhi.