review of earlier studies -...

Review of Earlier Studies

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REVIEW OF EARLIER STUDIES

2.1 Studies relating to the financial performance of banks

2.2 Studies Relating to Customer Service and Satisfaction

A number of studies have been made to analyse the financial as well as non-

financial performance of commercial banks in India and abroad. The studies on

financial performance are mainly related to Profitability, Operational and Technical

Efficiency, Asset Quality and Priority Sector Performance, and those on the non-

financial performance refer to the Quality of Customer Service, Customer

Relationship Management and Customer Satisfaction. In this study, an attempt is

made to evaluate and compare the performance and customer satisfaction of public

sector banks and new generation private sector banks in India in the post-liberalised

era. The literature reviewed as part of this study includes Ph.D Theses, Dissertations

and Research papers, Articles, Books and Committee Reports. In this chapter, a

brief account of the studies done relating to the performance of commercial banks

mainly in the post-reform period is given. These may be arranged under two

heads, viz.,

a) Studies relating to financial performance of banks, and

b) Studies relating to customer service and satisfaction of banks

2.1 Studies relating to the financial performance of banks

Amandeep (1990) has evaluated the profits and profitability of nationalised

banks and suggests that in order to improve the profitability of banks; they

should focus attention on the management of spread, burden, establishment

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expenses, incomes and deposit composition. The study also takes into account

priority sector lending and rural banking, and found that they do not have an

adverse effect on the banks profitability to a significant effect.1

Padmanabhan Working Group (1995) in its report on on-site supervision

recommended for supervisory intervention and introduction of new rating

model for banks on the lines of CAMELS Model with appropriate

modifications. The Acronym CAMELS denotes Capital adequacy, Asset

quality, management quality, earnings quality, liquidity and systems and

control. The committee recommended the model CACS for foreign banks and

CAMELS for Indian banks.2

Zachariah Thomas (1995) studied the performance effectiveness of

nationalised banks by taking Syndicate Bank as a case study in his Ph.D thesis

for the period of ten years from 1984 to 1993-94 using EMEE model

developed by the researcher. He examined various aspects like growth and

development of banking industry, achievements of syndicate bank in relation

to capital adequacy, asset quality, profitability, growth, productivity, social

banking, and customer service, and also made a comparative analysis of the

performance effectiveness of Syndicate Bank in relation to nationalised banks. He

found that five nationalised banks showed low health performance, seven, low

priority performance and eleven, low efficiency performance in comparison with

Syndicate Bank.3

Bhattacharyya A (1997) examined the impact of partial liberalization during

the mid-1980s on the productive efficiency of different categories of banks

using DEA. The study covered 70 commercial banks during the period 1986-

1991. It is found that PSB had the highest efficiency followed by foreign

banks. The private banks were found to be least efficient. Also, it was seen


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that there is a temporal improvement in the performance of foreign banks;

virtually no trend in the performance of private banks; and a temporal decline

in the performance of public sector banks.4

Das Abhiman (1997) has examined the efficiency of 65 commercial banks

using cross section data for the year 1995 and finds that the banks in India

were more technically efficient than allocative efficiency, and that there are no

significant differences in any efficiency measures between public and private

banks, except in the scale of efficiency.5

Pradeep K Das (1997) evaluates the competitive advantage of different bank

groups using Matrix analysis based on eight twin parameters. Foreign banks,

SBI and its Associates, and private banks were found to have considerable

advantage over the other groups. The research relates to the early post- reform

phase. The nature of competition has changed drastically; since then banks

have undergone vast restructuring exercises too.6

Rao and Dutta (1998) has made an attempt to derive rating based on CAMEL

and developed 21 parameters. Separate rating for each parameter and a

combined rating model were derived for all nationalised banks (19) for the

year 1998. The study finds that the Corporation Bank has the best rating

followed by the Oriental Bank of Commerce and the worst rating is that for the

Indian Bank, preceded by the UCO Bank.7

The Verma Committee (1999) was assigned the task of identifying and

restructuring weak public sector banks using seven financial indicators,

namely, CRAR, coverage ratio, ROA, net interest margin, operating profit to

average working fund, cost to income and staff cost to net interest income plus

other income. The committee identifies the United Commercial Bank, the

United Bank of India, and the Indian Bank as weak banks8.

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RBI (2000) studied how deregulation had affected the banks performance. The

study covers all the categories of banks .Capital adequacy and asset quality

have both improved over the period 1995-96 to 1999-00. Profit per employee

of public sector banks has witnessed a significant rise during the period.9

Subramanian, R.Venkat and Raghavan K.S (2001), in their book

‘Operational Efficiency of Banks, Banking in India in the New Millennium;

Issues Challenges and Strategies’, show that among public sector banks, the

Bank of Baroda has registered the highest level of efficiency and operating

profit per employee. Among the private banks IndusInd Bank followed by the

City Bank registered the highest and second highest operating profit per

employee respectively. However, among nationalised banks, there existed

wide variations in efficiency.10

Avinandan Mukherjee, Prithwiraj Nath and Manabendra Nath Pal (2002)

explore the linkage between performance benchmarking and strategic

homogeneity of Indian commercial banks. They devise a method of

benchmarking performance of Indian commercial banks using their published

financial information, define performance by how a bank is able to utilize its

resources to generate business transactions, and measure it by their ratio,

which is then called the efficiency. They find that the public sector banks

generally outperform the private and foreign banks in this rapidly evolving and

liberalizing sector11.

Ram Mohan TT (2002) who evaluates the performance of all groups of banks

in absolute and real terms, observes that the efficiency of the banking system

as a whole has measured as declining, while the spread has improved12.

Bharathi Patak (2003), in his study, ‘A Comparison of the Financial

Performance of Private Sector Banks’ makes an attempt to have an insight


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into the financial operations of some new generation private sector banks in

India. A sample of 5 banks, Indus Ind Bank Ltd., HDFC Bank Ltd., ICICI

Bank Ltd. and UTI Bank Ltd. were taken up for financial analysis with

respect to a period of five years from 1996-97 to 2000-01. The financial track

record was scrutinised on the basis of four parameters-financial, operational,

profitability and productivity. The working of all the banks was satisfactory but

the HDFC Bank Ltd. emerged as the top performer among them, followed by the

ICICI Bank Ltd13.

Nagarajan. N (2003), in his article 'Regulation as an Augmenter of

Competition: The Indian Experience with the Banking Sector' attempts to

draw broad contours of a feasible sequencing strategy which is based on the

Indian experience, and suggests strengthening the existing entities before

opening the sector to competition. Also, strengthening finance especially

capital, and changes in policy, procedures, enhanced disclosure, and erection

of stringent entry-barriers, a new supervision strategy and the adoption of the

best international practices are measures needed14.

Ruchi Trehan and Niti Soni (2003), in their study entitled ‘Efficiency and

Profitability in Indian Public Sector Banks’ attempt to analyze the operating

efficiency and its relationship with profitability, in the public sector banking

industry in India. The analysis of the relationship between the group status and

technical efficiency shows that the banks affiliated to the SBI group are more

efficient than the nationalised banks, and that the difference in the efficiency

levels of these two groups is statistically significant15.

Kapoor G P (2004), in his book titled ‘Commercial Banking’ analyse the

performance of banks from 1981-82 to 1999-00 and reveal that the public

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sector banks registered lower rates of growth in the post- reform period

compared to the pre- reform period16.

Prasad A and Saibal Ghosh (2004) in their study ‘Competition in Indian

Banking-An Empirical Evaluation’ comment that competition in the Indian

banking sector has increased since the inception of the financial sector reforms

in 1992. Using annual data on scheduled commercial banks for the period

1996–2004, the article evaluates the validity of this proposition in the Indian

context. The empirical evidence reveals that Indian banks earn revenues as if

they were under monopolistic competition17.

Ram Mohan and Ray (2004) made a comparison of technical, allocative and

revenue maximization efficiency among public, private and foreign banks. A

balanced panel data set for 58 banks has been utilized for computing DEA

based efficiency scores. Their study covered the period 1992-2000 and they

have found that public sector banks performed significantly better than private

sector banks but not differently from foreign banks on the revenue

maximization measure. Further, the superior performance of public sector

banks is to be ascribed to higher technical efficiency rather than higher

allocative efficiency. It has also been noted that State Bank of India turned out

to be efficient on all counts18.

The EPW Research Foundation (2004) has undertaken a stock taking of the

progress made by scheduled commercial banks in India over the 30- year period

since 1972. It was found that in the post- reform period, the banking system has

faltered in its traditional development role of savings mobilisation and provision

of productive credit. The study points out the decline in rural branches,

persistence of inter-regional disparities, fall in priority sector lending, credit of

smaller size and credit to informal sectors19.


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Veni P (2004) studied the capital adequacy requirement of banks and the

measures adopted to strengthen their capital ratios. The study points out that

while rating banks, agencies usually adopt CAMEL model, and capital

adequacy is considered as the key parameter of bank rating20.

Chakrabarti Rajesh and Chawla Gaurav (2005) conducted the study on

‘Bank efficiency in India since the Reforms - An Assessment using the DEA

Model’ to evaluate the relative efficiency of Indian banks during the period

1990–2002. The results suggest that on a “value” basis, the foreign banks, as a

group, have been considerably more efficient than all other bank groups,

followed by the Indian private banks. From a “quantity” perspective, however,

the Indian private banks seem to be doing the best while the foreign banks are

the worst performers. This seems to reflect the general policy of foreign banks

to “cherry-pick” more profitable businesses rather than offer banking services

to a wider section. The public sector banks have, in comparison, lagged behind

their private counterparts in performance21.

Joy S (2005) in his study ‘Performance Evaluation of Private Sector Commercial

Banks in Kerala’ tries to find out the extent of customer satisfaction with the

services provided by private sector banks in Kerala and the overall performance

of different bank groups in India with special reference to productivity, fund

management, profitability growth, and social commitment. He uses 10 years’ data

from 1992-93 to 2001-02. Based on the available absolute data, all the variables

under study were found to favour the public sector banks, followed by private

banks and foreign banks. But on the basis of relative data, the performance

of public sector banks appears to be unsatisfactory. The new generation

banks are strong in respect of growth rates. On the basis of comparative

performance, foreign banks stand first. Nationalised banks are very strong

in growth, productivity and profitability. Regarding various services

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rendered by different groups of banks, the public sector banks are rated far

below the foreign banks and private banks except in the case of updating of

pass book22.

Milind Sathye (2005) examined the impact of privatisation on bank performance

and efficiency, using data for the period from 1998-2002. He has concluded that

private sector banks have performed better than the PSB in respect of certain

financial performance parameters23.

Satish, Juture Sharath and V Surendar (2005) analysed the performance of

55 Indian commercial banks for the year 2004-05 by using CAMEL model.

They conclude that the Indian banking system looks sound and information

technology will help the banking system to grow in strength in the future24.

Sundaram S, Kanjana P K and Geetha S (2005) who conducted an analytical

study on the Efficiency of Scheduled Commercial Banks in India have analysed

important inputs or parameters such as deposits, advances, net profit, spread,

establishment expenses, working fund, total expenses, business, total income, and

burden in context of branches and employees, for the period from 1995 to

2004-05. The commercial banks were divided into three groups, viz., SBI and

its Associates, Nationalised banks and Private sector banks including old and

new generation banks. In terms of deposits, advances, net profit, spread,

working fund, total expenses, business and burden with regard to employees,

the private sector banks registered a higher growth rate. In contrast, the

establishment expenses and total income of the SBI group recorded the highest

rate. The private banks have contributed in a justifiable manner. The volume

of business is found to have reached the peak while establishment expenses are

very low in the private group25.


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Uppal R K and Rimpi Kaur (2005), in their paper ‘Indian Banking Sector-

Efficiency in the Post-Banking Sector Reform Era–New Challenges and

Future Opportunities’ analyse the efficiency of all bank groups for the period

from 1999-00 to 2004-05. The paper concludes that the efficiency of all bank

groups has increased in the second post- bank reforms era in terms of some

parameters of efficiency, such as profit per employee, profit per branch,

business per employee, business per branch and expense per branch. The

performance of PSB is very poor and the reforms are more beneficial to the

new private banks and foreign banks26.

Bodla B.S and Richa Verma (2006) conducted a study on the evaluation

of the performance of banks through the CAMEL model: A case study of

the SBI and the ICICI Bank Ltd. for the period 2000-01 to 2004-05 reveals

found that the SBI has an edge over the ICICI Bank Ltd. in terms of Capital

Adequacy. However, the reverse is true regarding asset quality, earnings

quality and management quality. The liquidity position of both the banks is

sound and does not vary significantly27.

Bodla B.S and Richa Verma (2006) studied the impact of reforms on the

banking sector and variations in the performance of different bank groups.

Performance of commercial banks has been measured from 1987-88 to 2003-

04, using annual compound growth rate of deposits and advances, deposit per

employee, advances per employee, and NPA as percentage to Net Advances.

The study reveals that the performance of the banking sector has improved in

the post-reform period. The private sector and foreign banks have shown better

performance in terms of various parameters in comparison with PSB28.

Goutam Chatterjee (2006) has analysed the cost efficiency of banks in India

and finds that cost inefficiency of domestic banks in the post-reform period is

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not very high. Data also support a declining trend in inefficiency over time.

The lightly higher average inefficiency in the public sector banks points to a

need for granting more autonomy and instituting a proper incentive structure.

Branch rationalisation may also lead to lowering their costs29.

Janaki P Ramudu and S Durga Rao (2006), through their paper ‘A

Fundamental Analysis of Indian Banking Industry’ attempt to analyze the

profitability of three major banks in India: SBI, ICICI Bank Ltd, and HDFC

Bank Ltd. The variables taken for the study are Operating Profit Margin

(OPM), Net Profit Margin (NPM), Return on Equity (ROE), Earnings Per

Share (EPS), Price Earnings Ratio (PER), Dividends per Share (DPS), and

Dividend Payout Ratio (DPR) and brings out the comparative efficiency of the

selected banks30.

Rudra Sensarma (2006), in the research article entitled ‘Are foreign banks

always the best? Comparison of state-owned, private and foreign banks in

India’ estimates the efficiency of Indian banks and then discovers a measure of

productivity that includes an efficiency term. Following this comprehensive

measure, it is found that banks have improved their performance during the

period 1986 to 2000 in terms of both efficiency and productivity. Surprisingly,

foreign banks have been the worst performers throughout the period compared

with state-owned and private domestic banks31.

Ram Pratap Sinha (2006), through his research paper ‘Spread Efficiency of

Indian Commercial Banks’ makes a comparative assessment of public and

private sector bank intermediation cost efficiency during the reform period,

taking spread or net interest margin as the output indicator. The years covered

in the study are 1996-97, 1998-99, 2000-01 and 2002-03. The study

concentrates on 20 public and 10 Indian private sector banks and uses two


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non-parametric methods: the Free Disposal Hull (FDH) approach and the Data

Envelopment Approach for construction of the cost frontier for measurement

of efficiency. As per the FDH results, the observed public sector commercial

banks exhibit higher mean efficiency scores (when the year-wise figures are

averaged) than the observed private sector banks. In terms of DEA, however,

the observed private sector commercial banks have a higher mean cost and

higher technical and cost efficiencies than the observed public sector

commercial banks. The author conducts a test of significance to examine

whether the mean cost efficiencies of the two bank groups are significantly

different. The results are positive for both FDH and DEA32.

Saji kumar (2006), in his study on ‘The trends in the financial performance

of banks in India’ during 2000-01 to 2003-04 finds that the policy initiatives

have ushered in greater competitiveness among the banks by granting greater

autonomy in deciding upon the instrument to mobilise resources and deploy

them accordingly to ensure optimal returns. However, the change in the micro

and macro environment of the scheduled commercial banks has not yielded

significant gains in terms of interest income/other income, operating profits,

net profits and spread. In almost all the positive financial performance

indicators, the foreign banks are dominating, followed by the public sector

banks and the private sector banks33.

Sanjay J. Bhayani (2006), in the study ‘The Performance of the New Indian

Private Sector Banks: A Comparative Study’ analyses the performance of new

private sector banks based on the data of five years, i.e., from 2000-01 to

2004-05, through CAMEL model. For the purpose, four leading private sector

banks- ICICI Bank Ltd, HDFC Bank Ltd, UTI Bank Ltd and IDBI - have been

taken as sample and assigned ranks according to their performance in various

parameters of CAMEL. Then he assigns them overall ranking, which reveals

Chapter -2

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that the aggregate performance of the IDBI Bank is the best among all the

banks, followed by the UTI Bank Ltd.34.

Varghese K John (2006) has made an attempt to study the NPA of Indian

Commercial Banks comprising the State Bank of India and its Associates, 19

nationalised Banks, 21 old private banks and 9 new generation banks, for the

period from 1996 to 2005, using time series and panel data regression analysis.

The prudential norms implemented in the banking sector. The introduction of

competition is found to have a positive impact in controlling the rate of Gross

NPA. The new private banks are more cautious about productivity, and it has

definitely improved their financial performance and consequently the Gross

NPA has been reduced during the period under study. The old generation

banks are overstaffed and their productivity can be improved only by reducing

the staff strength. The priority sector lending and NPA have direct relationship

in the case of all banks except the new generation banks. But, in the case of the

new banks, there is an inverse relationship35.

Datar M K and Saumya Sankar Banerjee (2007), in their paper ‘Simultaneity

between Bank Profitability and Regulatory Capital’ attempt to study the

relationship between bank profitability and regulatory capital’ with the help of

pooled cross section data drawn from major commercial banks in India in a

simultaneous equation framework. Contrary to expectations, banks earning

higher profits were found to be better capitalized, and empirical results exhibit

a mixed picture. The envisaged relationship was found to be true only for

private and foreign banks36.

Narinder Kaur and Reetu Kapoor (2007) evaluated the profitability and

relative efficiency of PSB s in India in the post-liberalised era from 2001-05.

The results show that the overall profitability of PSBs has been increased. The


37

relative efficiency of nationalized banks is higher than that of State Bank

group. The best performers were Oriental Bank of Commerce and United bank

of India from the NB group, and State Bank of Hyderabad and State Bank of

Patiala from the SB group37.

Neelima Shankar (2007) after analysing the ‘Market share of various bank

groups in India’ comment that the private sector banks’ have made tremendous

strides in the mid-1990's when Indian banking scenario witnessed the entry of

some new private sector banks, and in the period between 2002 -2007, these

banks have grown by leaps and bounds. They have increased their income,

asset size, capital, reserves and surplus, deposits, advances, net profit and

outperformed their public sector counterparts in many areas. This growth was

accompanied by a rapid branch expansion. The network of private sector

banks grew at almost three times that of all scheduled commercial banks and

more than four times that of public sector banks. The star performers among

these banks were the Centurion Bank of Punjab, the HDFC Bank Ltd, the

ICICI Bank Ltd, and the Axis Bank Ltd. (formerly UTI Bank). These four big

banks expanded their branch network at a rapid rate of 14-16 percent p.a in

terms of compound growth rates and increase their staff strength. The public

sector banks witnessed a decline in the number of employees mainly due to the

restructuring and the adoption of IT infrastructure38.

Nikhil Kumar N (2007) in the paper entitled, ‘Analysis of performance of

banking sector since liberalistion’ tried to explore the effect of liberalisation

on the performance of banks. He used CAMEL Model to rate the

performance of all public sector banks, private sector banks and foreign

banks in India using the data for 15 years from 1991-92 to 2004-05. He

found that the foreign banks performed better than the other two sectors in

most of the parameters. On the basis of overall performance i.e., performance

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in all the CAMEL indicators, Corporation Bank, Karur Vysya Bank Ltd. and

the Bank of America are the best banks among the public sector, private

sector and foreign banks respectively39.

Usha Arora and Richa Verma (2007) have studied the Relative efficiency of

PSBs from 1991-92 to 2003-04, using the average compounding growth rate

method. Operational and productivity parameters are of major concern and the

performance of public sector banks is found to have improved. They have

become more innovative and have larger market share in today’s competitive

era. The Corporation bank ranks at the top40.

Ved Pal and N S Malik (2007) in their study investigate the differences in

the financial characteristics of PSB, Private banks and FB in India for the

period 2000-2005,based on factors such as profitability, risk and efficiency.

The foreign banks are found to be better performers as compared with the

other two categories of banks in general and in terms of utilisation of resources

in particular, during the study period41.

Li-Hua Huang, Mei-Ai Cheng, Shyr-Juh Chang (2008) investigated the

effects of the first financial restructuring (FFR) on productivity growth,

technical progress and efficiency change, using data from 42 commercial

banks in Taiwan from 2001 to 2004 using Malmquist index of productivity

change. It is found that the Taiwan Commercial Bank on an average

experienced a 117.39 percent increase in productivity growth, of which 2.11

percent is due to efficiency change and 115.28 percent to technical progress,

over the four-year period. In addition, during the four year period, a one

percent reduction in the non-performing loan ratio resulted in 1.85 percent

growth in productivity; a 1 percent increase in the capital adequacy ratio led to

2.15 % growth in productivity42.


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Mahesh H P and Shashanka Bhide (2008) made an attempt to examine the

efficiency levels of Indian banks for the period from 1985-2004 by employing

stochastic frontier analysis. They studied bank-specific cost, profit and

advance efficiencies using Battese and Coelli approach. The results show that

deregulation or reforms have had a significant impact on all the three types of

efficiency measures. Advance efficiency has declined for the entire industry

after deregulation. Cost efficiency has improved and profit efficiency has

shown a varying trend. Nationalised banks rank first in cost efficiency; private

banks rank first in profit efficiency and SBI and its associates ranked first in

advance efficiency. Foreign banks are the least efficient in all the three

efficiency estimates. The study also shows that large banks are more efficient

than the smaller ones43.

Nageswar Rao and Shefali Tiwari (2008) analysed the factors affecting the

efficiency of 5 selected PSBs viz., Bank of Baroda, SBI, Canara Bank, PNB

and Bank of India by using product moment correlation method. The results

show that efficiency factors related to employees and liquidity were not having

significant correlation with any of the efficiency output constructs, i.e.,

deposits, advances and assets, whereas per branch efficiency factors and cost

of deposits are positively correlated with the output constructs44.

Rachita Gulati and Sunil Kumar (2008), evaluated the technical efficiency

and ranking of 27 public sector banks operating in India, using data

envelopment analysis (DEA) models, namely, CCR model and Andersen and

Petersen's super-efficiency model, based on the data for the year 2004-2005.

Only seven of the 27 banks are found to be efficient and thus, define the

efficiency frontier; technical efficiency scores range from 0.632 to 1, with an

average of 0.885. Thus, Indian public sector banks, on an average waste the

inputs to the tune of 11.5 percent. Andhra Bank has been observed to be the

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most efficient bank followed closely by Corporation Bank. Further, the banks

affiliated to the SBI group turned out to be more efficient than the nationalized

banks. The regression results precisely indicate that the exposure to off-

balance sheet activities, staff productivity, market share and size are the major

determinants of technical efficiency45.

Ram Pratap Sinha (2008) in his paper titled ‘Performance evaluation of

Indian commercial banks in the Prompt Corrective Action Framework: An

Assurance Region Approach’ seeks to combine the ratio approach adopted by

the Reserve Bank of India with the assurance region-based measure of

technical efficiency to find out a composite data envelopment analysis (DEA)

based on the efficiency indicator of 28 observed commercial banks for 2002-

03 to 2004-05. The prompt corrective action (PCA) framework relies on three

major indicators of banking sector performance: Net Non-Performing Assets

(NNPA), Capital-to-Risk-Weighted Assets Ratio (CRAR) and Return on

Assets (ROA). The results show that the observed private sector commercial

banks have higher mean technical efficiency score compared to the public

sector. Out of the 28 observed commercial banks considered for the study, six

were found to be efficient. A study of the technical efficiency scores across

ownership groups reveals that the observed private sector banks have higher

mean technical efficiency scores compared to their public sector counterparts.

Finally, most of the observed commercial banks exhibit decreasing returns to

scale for the period under observation 46.

Usha Janakiramani (2008), in her study assesses in detail the status of

operational risk management in the Indian banking system in the context of

Basel II. The expected coverage of banking assets as well as the approach

adopted for operational risk capital computation is compared broadly with the

position of the banking system in Asia, Africa and the Middle East. A survey


41

conducted on twenty two Indian banks indicates insufficient internal data,

difficulties in collection of external loss data and modelling complexities as

significant impediments in the implementation of operational risk management

framework in Indian banks. The survey underscores the need to devote more

time and resources if banks desire to implement the advanced approach under

Basel II47.

Surya Chandra Rao (2008) conducted a study titled ‘Banking Reforms in

India’ an evaluative study of the performance of commercial banks with the

objective of comparing the performance of public and private sector commercial

banks in India since banking sector reforms. The results show that the

performance of both the sectors have improved considerably after the reforms.

The entry of new generation private Sector banks is found to have increased

competition and the competitive environment creates challenges for the public

sector banks. The financial health of banks has improved due to prescribed

prudential norms and the expectations of the customers have been growing48.

Bodla B S and Richa Verma (2009) studied the earnings quality ratios of

scheduled commercial banks in India – bank -wise and sector wise analysis as

worked out in line with the CAMEL model for the period from 1991-92 to

2005-06. Banks operating in India have shown appreciable improvement in

their fee -based income. Foreign banks rank at the top on all ratios except net

profit to average assets ratio49.

Mihir Dash and Annyesha Das (2009), in their study titled A CAMELS

Analysis of the Indian Banking Industry, compares the performance of public

sector banks with private/foreign banks under the CAMELS framework. The

data used for the study were the audited financial statements of a sample of

Indian banks over the five preceding financial years. The results of the study

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42

show that private/foreign banks fared better than public sector banks under

most of the CAMELS factors in the study period. The two contributing factors

for the better performance of private/foreign banks were management

soundness and earnings and profitability50.

Nageswar Rao and Shefali Tiwari (2009) in their study reveal the factors

influencing the efficiency of commercial banks .They find that the most

influencing factor in the case of PSBs is related to per branch and operations and

the sub-factors are operating profit per branch, and cost of deposits followed by

the factors influencing ultimate profits with return on capital and credit-deposit

ratio as sub-factors. Efficiency factor influencing ultimate profits with return on

capital were the most influencing factors in the case of foreign banks51.

Wirnkar Alphonsius Dzeawuni (2009), in his paper, ‘CAMEL-based derived

W-score function for banks performance evaluation: An urgent necessity’ has

made an attempt to derive an integral CAMEL-based function that can be used

by bank regulators and managements to check, monitor, identify and correct

emerging problems at short notice on a daily, weekly, monthly or annul basis

before they become out-of-bounds or unbearable. The bank' regulators and

those in academia are implored to test the efficacy of the CAMEL (CLEAM)

derived function and certify its application in the banking industry52.

Debaprosonna Nandi (2010) in his paper, ‘Banking sector reforms in India

and performance evaluation of commercial banks’ has made an attempt to

assess the impact of reforms on the efficiency and profitability of selected

Indian commercial banks in the southern and northern districts of West

Bengal for a period of 15 years from 1992- 200753.

Harsh Vineet Kaur (2010) has made a comparative assessment of the

performance of the public sector, private sector and foreign sector banks in India


43

through CAMEL Model, by taking the data for the period from 2000-01 to 2006-

07. The results show that among the public sector banks, on an aggregate basis,

Andhra Bank and State Bank of Patiala shared the first rank. Among the private

sector banks Jammu and Kashmir bank ranks the first followed by HDFC Bank

Ltd.; Antwerp Bank is the best bank among the foreign banks54.

Mohi-ud-Din Sangmi and Dr.Tabassum Nazir (2010) in their research

paper, ‘Analyzing the financial performance of commercial banks in India: An

Application of CAMEL Model’ made an effort made to evaluate the financial

performance of the two major banks operating in northern India, viz., Punjab

National Bank from the public sector, and Jammu and Kashmir Bank Ltd.

from the private sector. This evaluation has been done by using CAMEL

parameters, the latest model of financial analysis. Through this model, it is

highlighted that the position of the banks under study is sound and satisfactory

so far as their capital adequacy, asset quality, Management capability and

liquidity are concerned. The study reveals that both the banks are financially

viable as both have adopted prudent policies of financial management. Both

the banks have managed their capital adequacy ratio well above the minimum

standard fixed by RBI and comparatively the position of PNB is better in more

parameters than in the case of JKB55.

Syed Ibrahim M (2010) made an effort to evaluate the operational

performance of the commercial banks in India with special reference to the

scheduled commercial banks, since 2000. The study is diagnostic and

exploratory in nature, and makes use of secondary data and is confined only to

the specific areas such as aggregate deposits mobilized by these banks, Loans

and advances, Credit-Deposit ratio and Investment-Deposit ratio, for the ten

years from the year 2000 to the year 2009 .The study finds and concludes that

Chapter -2

44

the scheduled commercial banks in India have significantly improved their

operational performance56.

The Analyst Magazine, Banking Special (2010) presents its seventh

consecutive study of the annual performances of Indian banks. The study is

based on the internationally renowned CAMEL methodology and examines

the efficiency of 64 banks categorised into public sector banks, private sector

banks and foreign banks based on the parameters namely Capital Adequacy,

Asset Quality, Management Quality, Earnings Quality and Liquidity. Among

the public sector banks, the best performed banks were Canara Bank in capital

adequacy, Andhra bank in asset quality and earnings quality, BOB in

management quality and State Bank of Patiala in liquidity. Andhra bank is the

best bank in overall performance. Among the private sector banks the best

performed banks were Tamil Nadu Mercantile Bank Ltd. in capital adequacy

and liquidity, Yes Bank Ltd. in asset quality and Management quality, and

Kotak Mahindra Bank Ltd in earnings quality. Tamil Nadu Mercantile Bank

Ltd. is the best bank in overall performance57.

Satish P Goyal (2011), in the paper titled ‘Performance Analysis of Top 5

Banks in India HDFC SBI ICICI AXIS and IDBI’ conducted an in-depth

analysis of the performance of selected banks through CAMELS Model. CAR,

Net Profit Margin, EPS, Credit Deposit Ratio, GNPA, NPA and ROA are the

parameters used for the study. HDFC Bank Ltd stands top in Capital adequacy,

ROA and CD Ratio whereas SBI stands first in earnings per share and AXIS

bank in net profit, GNPA and NNPA58.

2.2 Studies Relating to Customer Satisfaction of Banks

J.D Singh (1985), in his research paper, states that bank marketing in India

has yet to progress beyond the stage of pronouncement making by top


45

management. This has been reflected in a study of 36 banks, showing that there

is a lack of representation of the marketing function in banks' organisational

structure; fragmentation of marketing activities, absence of marketing

databases, and lack of trained marketing man power. The pivot of banking lies

in deposit mobilization, in which India still offers wide opportunities as it has

a large number of un-banked prospects; effective bank marketing can provide

the answer, if an adequate infrastructure of organisation and skills is built up59.

Goiporia Committee (1990) made wide ranging recommendations to improve

customer service in commercial banks in India such as technology up-

gradation, review of working of banking system, adherence of procedures in

time, compensating the customers for delay in collection of cheques, payment

of mail transfer, etc60.

Sasidharan K (1993) has conducted a study to find out the attitude of bank

customers in Kerala towards the banks and to measure the level of customer

satisfaction among deposit and loan customers according to the standard of

educational and regional basis, in rural and urban areas. The analysis of the

profitability and productivity reveals that the monetary policies of the

government, together with low productivity and high cost, had affected banks

adversely. The majority of the customers are found to have selected public

sector banks for their dealings but they are not fully satisfied .The customers

select the banks mainly on the basis of quality of service rendered by them and

of confidence in the banking system61.

Rajagopalan Nair (1994), in his study on rural bank marketing concludes that

rural customers consider security and liquidity as the major prerequisites for

the choice of deposits, and not the interest rates. Rural customers also deal

with many banks at a time. Their service quality perceptions found more

Chapter -2

46

favourable to old private banks, though their most preferred banks are the

nationalised banks, indicating that the security aspect over rides service quality

perceptions in the choice of banking products. An urban customer will have

sophisticated needs and the level of customer service may vary vastly from

their rural counterpart’s requirement. In future, service quality perceptions will

be influenced by the degree of technology adoption.62

Fullerton and Paul (1995), in their article titled ‘Customer Service’ describe

the service rendered by the Yorkshire Bank. They explain how this bank

increased its market share with the unique selling proposition service to the

customers. The bank's objective is to provide a service that anticipates and

satisfies the totality of the customer's financial needs across the financial life

cycle. An article in the International Journal of Bank Marketing in 1991

summarises some key findings:

1) Of customers who stopped doing business with a particular

organization; 66% did so because of poor service,

2) Attracting a new customer takes five times more effort than keeping

an existing one.63

Ramesh Sobti (1997) conducted a nation-wide survey to measure consumer

perceptions about various banks in India, which reflected that public sector

banks still reign supreme in the aspects of customer loyalty, image, and

customer orientation, though new private banks obtained better rankings for

customer orientation than their overall rank based on a set of aspects.64

Jazeela M (2001) in her study, ‘Customer Perception of Banking Products

and Services in Kerala with reference to Special Customer Segments in the

Urban Area’ finds that a large number of customers choose many banks at a

time, but public sector banks have had a larger share than other bank groups.


47

Nearness was the major reason cited by a large number of respondents,

followed by service and safety. In terms of overall customer satisfaction,

foreign banks and new private banks stood at the top and the ratings for public

sector banks were much lower. Service quality dimensions showed that

dimensions such as financial guidance and assurance, complaint-free

processing and speed were dependent on bank groups. The study also revealed

that the threat of switching in public sector banks was not severe as it was for

old private banks. Regarding the overall perception of customers about banks,

people might continue to judge the overall perception of image they have

about a bank65.

Pushpangadhan G ( 2002), in his study of the ‘Quality of Customer Service

in Public Sector Banks in Kerala’ gives an account of the comparative

analysis of private sector banks, public sector banks, and foreign banks

relating to the quality of products and services, Promptness in rendering

services, customers education and guidance, customer feedback, redress of

grievances and communication. He has also measured the attitude of

customers towards various facilities provided by public sector banks compared

to private sector banks and foreign banks. Taking into account various aspects

such as teller facility, display of identification board at the counter, may I help

you counter, display of time norms, adequacy of seating arrangements,

computerization and ATM facilities, the study concludes with an observation

that the performance of public sector banks has been poor compared to the

foreign banks. When compared to the private banks, there is no significant

variation66.

Eapen Varghese and C Ganesh (2003) have identified that a good customer

service in banks should have three basic tenets - courtesy, accuracy and speed.

Based on the responses of 776 customers of 10 public sector and 13 old private

Chapter -2

48

sector bank branches operating in Kerala, they infer that there is no difference

between the public sector banks and old private sector banks with regard to the

time customers have to spend to transact a case of business.67

Sureshchandar G S, Chandrasekhar, Rajendran and Anantharaman R.N

(2003) investigate the critical factors of customer- perceived service quality in

banks of a developing economy like India. They compare and contrast the

three groups of banks in India, viz., public sector banks, private sector banks

and foreign banks,with respect to the service quality factors from the

perspective of the customers. There seems to be a great amount of variation

with respect to the level of service quality offered by the three groups of

banks. Customers in developing economies seem to keep the “technological

factors” of services such as core service and systematization of the service

delivery as the yardstick in differentiating good and bad service while the

“human factors” seem to play a lesser role in discriminating the three groups

of banks. The service quality indices with respect to the three groups and the

Indian banking industry as a whole, offer interesting information on the level

of service quality delivered by banks in India68.

Ananthakrishnan G (2004) in his research article, ‘Customer Service in

Banks’ opines that with the advent of computers and ATMs, widens the gap

between customers and the banking personnel. Unless a change of heart

occurs, even the largest banks will find it hard to survive on their assumed

glory. Banks which take care to see the reality and react early will survive and

prosper, while those who continue the traditional path will find their market

share eaten away. Let us attempt a revisit to the basics of customer service,

viz. proper orientation, greeting customers with smile, knowledge about the

products of the banks, helping tendency, listening to the customers, and


49

keeping the branch premises clean. It is advantage “bank” when the customer

is delighted69.

Babu P. George and Purva G. Hegde (2004) in their article titled ‘Employee

Attitude towards Customers and Customer Care Challenges in Banks’

highlight that employees attitudes, their satisfaction and motivation are the

pre-requisites of customer satisfaction, which are, again, the sine qua non for

the competitive sustenance of the organization. They argue that sustainable

advantage is possible only through people and any normative proposal to

rework the “apprehension” traditionally attached to complaints should begin

with a radical shift away from perceiving service production and consumption

as isolated systems, to an altogether new conception of the product as

symbolic of a network relationship defined among the stakeholders and co-

evolved in an environment whose parameters are potentially altered through

recurrent inter-party negotiations involved in the contract70.

Elizabeth Duncan and Greg Elliot (2004) seek to explore empirically the

relationships between efficiency, financial performance and customer service

quality among a representative cross-section of Australian banks and credit

unions and the correlations between these categories of measures. In particular,

they seek to explore the strength of the relationship between efficiency, financial

performance and service quality. The results show that all financial performance

measures (interest margin, expense/income, return on assets and capital

adequacy) are positively correlated with customer service quality scores. In

contrast, the absence of a consistently positive relationship between efficiency

and financial performance suggests that financial institutions that pursue

improved financial performance through the single-minded pursuit of lower

costs may be fundamentally misguided.71

Chapter -2

50

Shajahan S (2005) conducted a study based on 100 account holders of ICICI

Bank in Chennai, recently, for portraying their varying levels of satisfaction.

To control the response bias and to increase the reliability of the data, a

structured pattern of questions was also used during a descriptive survey

research. Statistical tests were employed for the data analysis using SPSS. The

discriminant analysis, which emerged out of the study findings, explicitly

takes a logistic form that is typical for the adoption behaviour of new Internet-

based banking services, which enhances the level of satisfaction among bank

customers. Further, the discriminant equation, designed by the author, signifies

shifts in the levels of satisfaction from the basic banking services to special

electronic data-based services, and also predicts accurately the frequency of

visiting the site for various requirements. The author is of the opinion that

Internet literacy (as measured by the penetration of Internet usage in a country)

is the major factor underlying online banking penetration in India72.

Nalini Prava Tripathy (2006) in the article titled, ‘A Service Quality Model

for Customers in Public Sector Banks’ has made an attempt to analyze the

factors that are essential in influencing the investment decision of the

customers of the public sector banks. For this purpose, Factor Analysis, which

is the most appropriate multivariate technique, has been used to identify the

groups of determinants. Factor analysis identifies common dimensions of

factors from the observed variables that link together the seemingly unrelated

variables and provides insight into the underlying structure of the data.

Secondly, this study also suggests some measures to formulate marketing

strategies to lure customers towards banks73.

Arturo Molina and David Martin (2007) investigate the impact of relational

benefits on customer satisfaction in retail banking and present a causal model

that identifies a connection between the relational benefits achieved through a


51

stable and long-term relationship with a given bank and customer satisfaction

with retail banking. The results show that confidence benefits have a direct,

positive effect on the satisfaction of customers with their bank. However,

special treatment benefits and social benefits did not have any significant

effects on satisfaction in a retail banking environment.74

Jitenra Kumar and Mishra Monesh Jain (2007) in their study, ‘Constituent

Dimensions of Customer Satisfaction –A study of Nationalized and Private

Banks’ reveal that vigilance, competence, advancement in services, reliability,

vision, responsiveness, reach cost effectiveness and efficient process are the

constituent factors of customer satisfaction for nationalised banks, and for

private banks, the factors are service quality, reliability, competence, efficient

process, customisation, ATM facility, vision, vigilance, simplicity of system

and brand image. The factors and dimensions that have emerged in the study

provide an insight of the constituents of customer satisfaction for the banking

services in general and for the nationalised and private banks in particular.

Higher customer satisfaction can be achieved only through designing

appropriate communication, training of internal customers and offering the

services in an effective manner75.

Vigg Silky, Mathur Garima and Holani Umesh (2007), in their study

‘Customer Satisfaction in Retail Services: A Comparative Study of Public and

Private Sector Banks’ analyse the major factors that are contributing towards

customer satisfaction in banking services and compare customer satisfaction of

public and private sector banks. The study reveals that innovative services,

network, access, technicalities, behaviour, comfort, and image are some of the

factors responsible for customer satisfaction and that there is no significant

difference in the customer satisfaction of public and private sector banks76.

Chapter -2

52

Reserve Bank of India(2008), Department of Statistics and Information

Management, Chennai Regional Office, Local Board (southern Region)

conducted a study ‘to evaluate the satisfaction level of customers on various

services rendered by the banks’, covering 2800 customers from 149 bank

branches selected, using systematic sampling method. The study evaluates the

staff attitude to the customers, infrastructural facilities, complaint handling and

redressal mechanism, interest rates and fees, loans, and credit card facilities. It

was observed that, for complaint handling and redressal mechanism, quick and

fast services and loan facilities, the private sector banks are better than public

sector banks and foreign banks. A majority of the respondents are highly

dissatisfied with the infrastructural facilities, interest rate for credit cards,

service charges and fees levied by the banks, especially private sector banks77.

Sumeet Gupta (2008) finds that e-banking is not fully used by the customers

due to inadequate awareness levels besides misconception about and lack of

trust in the system. New technologies will not be successful until customers

are satisfied with privacy and security aspects. It also requires some time to

earn confidence among the customers even if it is easier and cheaper than the

traditional methods78.

Abdulkarim S. Al-Eisa and Abdulla M. Alhemoud (2009) try to identify the

most salient attributes that influence customer satisfaction with retail banks in

Kuwait and to determine the level of the overall satisfaction of the customers

of these banks by using a multiple-attribute approach proposed by Shin and

Elliott in 2001. The most crucial attributes for predicting customer satisfaction

with retail banks in Kuwait are found to be fast service, courtesy and

helpfulness of employees and availability of self-banking services.79

Anders Gustafson (2009), comments that the competition in the banking

sector today is fierce. The development of technology reduces the contact


53

between the bank staff and the customers and so, retaining customers, becomes a

very relevant issue today80.

Michael Rod, Nicholas J, Jinyi Shao and Janet Carruthers (2009) examine

the relationships among three dimensions of service quality that influence overall

internet banking service quality and its subsequent effect on customer satisfaction

in a New Zealand banking context. The results show significant relationships

among online customer service quality, online information system quality,

banking service product quality, overall internet banking service quality and

customer satisfaction81.

Mittal Anurag (2009), in his study, ‘Relationship Marketing Effectiveness in

Indian Banking’ compares the relationship market orientation and customer

satisfaction in the retail banking activities of the selected 5 public sector banks

viz., SBI, PNB, Canara Bank, Bank of Baroda and Bank of India, and 5 private

sector banks, namely, ICICI, HDFC, UTI Bank, City Bank and Standard

Chartered Bank in the State of Delhi. Customers of both the groups of banks

were of the opinion that there is wider difference in the application of

customer relationship marketing in the banks under study. The relationship

marketing approach is not effectively administered in public sector banks and

so customer satisfaction level is low82.

Usha Lenka, Damodar Suar and Pratap K.J. Mohapatra (2009) examine

whether service quality of Indian commercial banks increases customer

satisfaction that fosters customer loyalty. Data were collected from 350 valued

customers of scheduled commercial bank branches in Orissa (India) by using a

questionnaire containing information on socio–demographic variables along

with human, technical and tangible aspects of service quality, customer

satisfaction, and loyalty. The results suggest that better human, technical and

tangible aspects of service quality of the bank branches increase customer

Chapter -2

54

satisfaction. Human aspects of service quality were found to influence

customer satisfaction more than the technical and tangible aspects. Customer

satisfaction furthers customer loyalty. Increase in service quality of the banks

can satisfy and retain customers. In the Indian banking sector, human aspects

are more important than technical and tangible aspects of service quality that

influence customer satisfaction and promote and enhance customer loyalty83.

Puja Khatri and Yukti Ahuja (2010) through their research work, ‘A

Comparative Study of Customer Satisfaction in Indian Public Sector and

Private Sector Banks’ compare the public sector banks and private sector

banks in terms of customer satisfaction using SERVQUAL Model. Private

banks seem to have satisfied their customers with good services and they have

been successful in retaining their customers by providing better facilities than

public sector banks. Private sector banks have been successful in achieving

such relationship with customers.84

Pandit C. Bilamge (2011) in his study ‘A Comparative Study of Customer

Perception towards Services rendered by Public Sector and Private Sector

Banks’ studied the issues relating to customer services in the ICICI Bank Ltd

and SBI. Attributes such as cooperation and behaviour of staff, ATM services,

basic facilities, cheque collection time etc. were considered. The study reveals

that the ICICI Bank Ltd. is far ahead of the SBI in providing quality services

to their customers85.

Uppal R K and Poonam Rani (2012), in their study titled ‘Customer perception

towards better banking service in India – An empirical study’, analysed customer

perception about CRM, reliability, accuracy , security and transparency among

the customers of public sector banks, Indian private sector banks and foreign

banks in Amritsar, Punjab. They have found that most of the customers are

satisfied with the different banking services and that customer satisfaction can


55

be improved by ensuring more speed in rendering transactions and giving

prompt service.86

Research gap

A thorough review of the literature for this study revealed that the earlier

studies differed from one another in the selection of indicators, selection of

banks, selection of period, selection of statistical tools and techniques. Most of

the performance evaluation studies were confined to a few indicators, which

failed to depict a clear picture of the overall performance. None of the studies

analyses and compares the performance of the top public sector banks and new

generation private sector banks in India, as the main competition is between

these two sectors. The present study covers all the core areas which affect the

performance of a bank, viz., Capital adequacy, asset quality, managerial

efficiency, earnings quality, liquidity, growth, social banking performance and

customer preferences and satisfaction and analyses it bank-wise, bank group-

wise and bank sector-wise, after controlling the effect of time and with the

help of the latest statistical techniques. Against this backdrop, the present

study would be a pioneering venture for evaluating and comparing the overall

performance of banks and bank sectors in the post-liberalised era and it is

hoped that this will throw some light on the strengths and weaknesses of all

the banks under study and offer suggestions to further strengthen their position

in the market.

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