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

2

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.

3

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.

4

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.

5

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

6

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

7

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.

8

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.

9

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.

10

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

11

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

12

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.

13

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.

14

(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.

16

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.

17

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

18

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.

19

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

20

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

21

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

22

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

23

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

24

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,

25

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

26

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.