EVOLUTION OF INDIAN BANKING SYSTEM:

Banking in India has its origin as early as the Vedic period. S.K Ghosh(1991) believed that the transition from

money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a

section of his work to deposits and advances and laid down rules relating to rates of interest. According to

Maheshwari(2005), during the Moghuls period, the indigenous bankers played a very important role in lending

money and financing foreign trade and commerce. Banking in India originated in the eighteenth century. The

first banks were The General Bank of India which began operations in the year 1778, followed by The Bank of

Hindustan. Both these bank are not under operation now. The Bank of Calcutta was the next one to start its

operation In June 1806 followed by the Bank of Bombay and Bank of Madras. These three together constituted

the Presidency Bank and were established under the charters from the British East India Company. These banks

for many years acted as the quasi central banks. The three banks merged in 1925 to form the Imperial Bank of

India, which upon India’s independence became the State Bank of India. (Charles Albert, 1995)

The Union Bank was establishes in the year 1838, but failed in the year 1848 because of the economic crisis of

1848-49. The Allahabad Bank, established in 1865 is the oldest Joint Stock Bank in India. With the advent of

trade many banks opened up during this period but most of them failed because of the dealing with speculative

ventures. Due to this the depositors lost money and interest in keeping deposits with banks. Subsequently,

banking in India remained the exclusive domain of Europeans for several next decades until the beginning of the

twentieth century. Foreign banks too started to arrive, particularly in Calcutta in the 1860s.The comptoire d’

Escompte de Paris opened in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and

Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most

active trading port in India, mainly due to the trade of the British Empire, and so became a banking centre. As

per Masood (2003) the first Indian Joint Stock bank was Oudh Commercial Bank, established in 1881 in

Faizabad. It failed in 1958. The next was Punjab National Bank, established in Lahore in 1895, which has

survived to the present and is now one of the largest in India. At the turn of the twentieth century, many small

banks, most of which served particular ethnic and religious communities. The presidency banks dominated

banking in India but there were also some exchange banks and a number of Indian Joint stock banks. All these

banks operated in different segments of the economy. Gulati (2007) says that Indian Joint stock banks were

generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange

banks. The period between 1906 and 1911, was the establishment of banks inspired by the “Swadeshi

movement”. This movement inspires local businessmen and political figures and due to this a number of banks

were established and the most prominent one which have survived till date are Bank of India, Corporation Bank,

Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The period between the First World War

and the Second World War was challenging for the Indian Banking. These years took a toll on the banks with

many banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic

activities. At least 94 banks in India failed between 1913 and 1918.

India’s independence marked the end of a regime of laissez-faire for the Indian banking. The Government of

India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy

Resolution adopted by the government in 1948 envisaged a mixed economy. Despite these provisions, control

and regulations, banks in India except the State Bank of India, continued to be owned and operated by private

persons. This all changed with the nationalization of major banks in India on 19 July, 1969.

NATIONALISATION:

The Indian banking industry had emerged as a large employer and a debate had ensued about the possibility to

nationalize the banking industry. Indira Gandhi, the Prime Minister of India expressed the intention of the

Government of India in the annual conference of the All India Congress Meeting. Her move was swift and

sudden, and the GOI issued an ordinance and 8 nationalized the fourteen largest commercial banks with effect

from the midnight of July 19, 1969. A second dose of nationalization of six more commercial banks followed in

1980. The reason stated for the nationalization was to give government more control of credit delivery. With this

the government owned ninety one percent of the banking business of India. In the year 1993, the government

merged new bank of India with the Punjab National Bank. It was the only merger between the nationalized

banks and resulted in the reduction of the number of nationalized banks from twenty to nineteen.

Financial Market:

In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial

banking and asset management business. With the openings in the insurance sector for these institutions, they

started making debt in the market. Competition among financial intermediaries gradually helped the interest

rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high

price while depositors had incentives to save. It was something between the nominal rate of interest and the

expected rate of inflation.

Regulators:

The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The

Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more

independent. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development

Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator

for the financial services sector instead of multiplicity of regulators.

The Banking System:

Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the

commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The RBI has

given licences to new private sector banks as part of the liberalization process. The RBI has also been granting

licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are

yet to deliver services to industrial finance, retail trade, small business and agricultural finance. The PSBs will

play an important role in the industry due to its number of branches and foreign banks facing the constraint of

limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the

Government to encourage the PSBs to be run on professional lines.

2.3 CLASSIFICATION OF BANKS:

On the basis of ownership banks can be classified as Public sector banks, private sector banks and cooperative

banks.

Public Sector Banks: Public sector banks are those banks that are owned by the government. The government

owns these banks. In India 20 banks were nationalised in 1969 and 1980 respectively. Social welfare is their

main objective. Among public banks the bulk of banking business is dominated by the state bank of India (SBI)

and seven associate institutions. The SBI group was form after the Imperial Bank of India was nationalised in

1955.After India’s independence, the RBI held a majority share in eight banks. Following the enactment of SBI

act of 1959, these eight banks later became the subsidiaries of the SBI. Two of this subsidiary bank merged to

form the State Bank of Bikaner and Jaipur. (Berry.S et all 2004)

Altogether there are 302 commercial banks in India, with 223 banks in public sector. Out of these 196 are

regional rural banks were set up jointly by the RBI, state governments and sponsoring commercial banks with a

view to develop the rural economy credit to small farmers artisans and other individuals engaged in agriculture.

In addition to regional rural banks as well as the SBI as its associates, India’s public sector bank includes 20

nationalised public commercial banks. During the initial stages of India’s independence, private commercial

banks continued to operate freely. On the other hand public sector banking was closely integrated into the

development plans of the Government of India. Excluding SBI the four largest public sector banks are Bank of

Baroda, Canara Bank, The Bank of India and the Punjab National Bank (Kaptan.S.S and Choubey.S.H 2003)

Private Sector Banks: These banks are owned and run by the private individuals. An individual has control over

these banks in proportion to the shares of the banks held by him. India has 34 domestic private banks. Some of

the India’s most private bank has a long tradition in that country. Among 34 private banks in India, 25 were

founded before independence. Many banks found during colonial rule continue to operate today. For instance,

City Union Bank was founded in 1904 and Karur Vysya Bank was founded in 1916.These banks are often

referred as old private sector banks. Domestic private sector banks account for 10 percent of total bank assets

and 9 percent of branches of commercial banks.

Following India’s Independence there were no private banks chartered in India. This restriction came to an end

in 1993 when a new set of small private sector banks were allowed to operate. They include Centurion Bank,

Global Trust Bank, Industrial Credit and Investment Corporation of India (ICICI) bank, IndusInd Bank and

Times Bank. By 2002 Reserve Bank of India(RBI) approved two additional private banks to operate.

IndusInd was the first private bank to be established in India since its independence. IndusInd has also been a

pioneer in internet banking in India. New domestic private banks also differ from other commercial banks in its

efforts to grow aggressively. Beginning in February 2000,Times Bank has merged with the housing

Development Finance Corporation(HDFC).A merger with the Bank of Madura has made ICICI one of the

largest private sector banks in India, with a combined assets of eight billion dollars. In 1999, ICICI bank had

150,000 workers and 64 bank branches across india. The merger has increased the ICICI customer base to over

three million people.(Ray.P 2008)

Co-operative Banks: These are those banks that are jointly run by a group of individuals. Each individual has an

equal share in these banks. Its shareholders manage the affairs of the bank.

2.4 Difference between private and public banks:

Banking is an institution where security of money plays an important role with accessibility. During the time of

investment the investor will try to invest his earning in a bank where the outcome is more and less risky. This is

top most important for nation like India where people are of savvy nature of their hard earn money.

The profitability is not the objective of Indian banks; there have not been many attempts to compare the

profitability amongst the various categories of banks. Verma (2001) attempted to determine the determinants of

profitability of SBI group, other nationalized and foreign banks in India. Sarkar & Das(1999) compared

performance of Public Sector Banks, Private Banks, and Foreign Banks on basis of financial management. On

the other hand Ram Mohan (2000) found that over these years the profitability of the Public sector Banks did

improve in comparison to the Private and Foreign Banks, but they have lagged behind in their ability to attract

investors at favourable interest rates and returns, they have been slow in technology up gradation and

improving staffing and employment practices, which may have negative implications on their longer–term

profitability.

Ram Mohan (2000) found that the public sector banks are less profitable than the private sector and foreign

banks in terms of overall profitability but their profitability is improving over the last five years. Analyzing

further, Rishi and Saxena (2004) found that public sector banks are ranked second after the Private Banks,

because they have higher burden which makes them less profitable as compared to the other banks. The Interest

rates is declining over the years for all categories of banks because over the last five year RBI has pursued the

policy of lowering the interest rates. The Interest earned ratio for the Indian Banks has almost been the same

across all categories. The interest paid rate of private sector banks are little more than the public sector bank.

This is a case of tactful management through which the private sector banks are able to fetch huge funds on the

basis of attractive interest rates. The RBI administers the interest rates of Public sector Banks and they have

little control over the lending and borrowing rates.

The private banks have traditionally been viewed as high cost operators. The reason for high operating expenses

is that these banks have been spending heavily on technology up gradation which may affect their profitability

in short term but which will improve their long-term returns as they leverage the technology to provide better

customer support. Another reason for heavy operating expenses is these banks are spending heavily on their

advertising campaign for brand promotion. The nationalized banks do not require spending on promotions, as

“Government Bank or Public Bank” is still a popular brand for Indian customer as far as money matters are

concerned. However, the situation has changed very fast in these five years. Public sector banks, in order to

compete with the other banks have realized that in order to remain in competitive market, Technology is the key

and are now expending heavily on the technology up gradation. The private banks are fully technology oriented

which makes the work easier and faster. ICICI Bank and HDFC Bank are the best example to describe the

development of the Private Sector Banks in India. They stand almost next to the biggest nationalized bank of

India that is STATE BANK OF INDIA. In a short span of time they have the biggest customer base. The

government and RBI has poor control over private banks. (Mishra, 2001)

Public banks have far better reach to remote people than any Private Banks. As public sector banks have a large

network of branches in rural and semi urban areas as well, where as private banks do not have branches in both

rural and semi urban areas, but when compare to per branch bank deposit public bank have much lower than the

private banks.

Performance of public and private sector banks:

The performance and the roles of private and public sector banks are undergoing changes. The banks, both

private as well as public have to now operate in an increasingly competitive environment. The competition for

public sector banks is coming from the private sector banks. Despite having the advantage of a substantial

presence and penetration in the rural areas, the public sector banks are under tremendous pressure to maintain

their margins and to survive the competition. The customer-centric approach of private sector banks have

thrown open many more challenges for the public sector banks especially in retaining customers and expanding

customer base. We have compared Public and Private sector banks based on 11 parameters, which are critical

while evaluating their performance. These criteria are as follows

1. Assets and Liabilities

2. Share in Aggregate Deposits

3. Priority Sector Lending

4. Sensitive Sector Lending

5. Credit Deposit Ratio

6. Cost of Funds and Return on Funds

7. Operating Profit and Net Profit

8. Net Profitability of Banks

9. Gross and Net NPAs

10. Capital Adequacy Ratio

11. ATM’s

STRATEGIES AND CHALLENGES:

The strategies and challenges for private and public banks are as follows

PUBLIC SECTOR BANKS

The public sector banks are turning the spotlight on the customer and offering quicker, better service. That

includes everything from ATM machines and computerized branches to never before seen marketing initiatives.

Clearly, public sector banks have woken up to competition. Post-liberalization, several new generation private

sector banks changed the face of the industry. Customers no longer had to stand in long queues or make 10 trips

for loans to be sanctioned. These changes are taking place at a particularly fast pace in few of the banks

including the State Bank of India, Corporation Bank, Indian Bank, Bank of Baroda and the Union Bank of India.

Private sector banks brought in concepts like customer relations officers focused teams and single window

banking. Moreover, with new technology, private sector banks like ICICI and HDFC Bank could offer customer

services like ATMs, phone banking, internet banking, automatic money transfer, mobile banking, Core banking

solutions and computerized monthly statements. Recently a new technology of cheque truncation is being

introduced.

Public sector banks focus had earlier remained on industrial credit, which was slowing down. Lending to

corporate mean higher margins for banks. As interest rates came down corporate began to consider alternate

sources of funds. Banks then began to explore possibilities like retail lending.

The two important challenges for public sector banks are.

To maintain profitability in spite of government norms and regulations, as to maintain their PLR.

Put in place appropriate technology of excellent standards that will make them be seen more as virtual

banks rather than brick and mortar.

This will lead to consolidation of their respective network. They must be given autonomy -- operational and

administrative -- and be completely board driven, including in the selection of the chief executive officer.

Finally, they must be taken out of the purview of the Central Vigilance Commission, even if it entails bringing

them under the Companies Act. They need to improve in the services like ATMs, Credit and Debit cards. They

lack behind in providing facilities like loans and other accounts. These branches are not interlinked with each

other and customers visiting hours are less.

PRIVATE SECTOR BANKS:

There are two types of private sector banks, the old and the new. As far as the old (mostly regional banks) are

concerned, inadequacy of capital will lead to their mergers sooner rather than later. Private sector banks have

good technology for handling transactions and also offer attractive products, but it cannot be said that corporate

governance and risk management are far superior to that of the Public Sector Banks.

Some of the most important challenges for private sector banks are:

Priority sector credit: Generally, private sector banks lend money to individuals and corporate sector

whereas sectors like agriculture, small-scale industries and retail trade small business is neglected

Consolidation and Convergence: The recent merger that happened was of Lord Krishna Bank with

Centurion Bank. RBI may be inclined to approve the merger. The regulator, which has been insisting

on promoters of smaller banks to lower their holdings, would possibly prefer such mergers. Centurion

Bank of Punjab needs the additional business to compensate for its relatively higher cost structures. It

can cross-sell its banking products through the LKB network, including traditional banking products

and fee-based services like wealth management products, to affluent NRI customers.

Conclusion for strategies and challenges:

In any banking system, no bank -- public or private -- can survive unless it continuously strives to transform its

organization into a self-governing, self-correcting and self-adjusting entity. For banks to grapple with these

problems and manage the future, structural and institutional rigidities need to be eased in two critical areas:

comprehensive legal support for recovery of bad debts and a fundamental change in the pattern of governance

for the PSBs. While public sector banks are in the process of restructuring, private sector banks are busy

consolidating through mergers and acquisitions (the sector has been recently opened up for Foreign

investments).

PSB’s need to improve in the services like ATM’s, Credit and Debit cards. They lack behind in providing

facilities like loans and other accounts. These branches are not interlinked with each other and working hours

are less. In case of Private sector banks customers are not aware of the facts and hidden costs in view, as there

are various products and facilities provided by the banks. The charges that are been taken are also too high.

Challenges and Opportunities exist for both the public sector as well as the private sector banks, their nature

however differs. From the 11 parameters, we have identified 3 areas of challenges separately for private and

public sector banks.

The Credit Deposit Ratio of Private sector banks is better compared to PSB’s

The Capital Adequacy Ratio of PSB’s is satisfactory compared to that of Private Banks

The Net Profit of PSB’s is better than Private Sector

2.5 7P’s of Banking Sector

Once the strategies have been developed by the banks, there is 7P formula to be used to continually evaluate and

revaluate banking activities. As the products, markets, customers needs change rapidly the organisation should

revisit these 7P’s continually in order achieve the maximum result in the competitive market . It is very

important for any bank to identify the 7 P’s of services so as to understand their customer’s perception and the

demand of the investors better and provide them with best of service (Bitner, 1990). The 7 P’s of banking covers

all the aspect of the bank which helps the investor to identify where to make an investment and its advantage.

1. Product mix

2. Price mix

3. Place

4.Promotion

5.People

6. Process

7. Physical evidence

PRODUCT MIX:

The product mix of a bank includes all different product lines a bank offers to its customers. The product line of

a bank might easily include more than 100 different services. In today’s competitive scenario it has become very

necessary for a bank to provide its customers with a wide variety of services and the best technology in order to

attract them. Private bank is more technological when compared to public bank. So the investors have plenty of

choices in selecting the product of the bank. The investors can analyse and invest according to the offers offered

by their consultant bank. Here is an example of some of the products offered by private Bank to its customers.

Offering: Private Bank's Savings Account is just the right product for everyone, salaried, employees or

businessmen, high net worth individuals and NRI's. The unmatched package of Private Bank Savings Bank

account given below brings the benefits of better, efficient and hassle free banking.

ATM Network: A Savings Bank Account with private Bank entitles you to a free ATM card, which enables you

to access your account anytime and at any ATM centre across the country. You can withdraw and deposit

money and cheques with your ATM card. Unlike most other ATMs, a UTI Bank ATM allows you to withdraw

up to Rs. 20,000 a day. In addition, cash can be withdrawn from any of the ATMs against your MasterCard

(domestic/international).

7-Day Banking: At select branches spread over the country, you can bank on all the 7days of the week (except

for public holidays), over extended working hours.

Telephone banking: Tele-banking service provides you instant access to your account. It offers you a wide

range of services over the phone such as account information, Balance Enquiry, Transaction Details, Statement

of Account, Status of your Cheque, etc.

PRICE MIX:

The price mix in the banking sector is nothing but the interest rates charged by the different banks. In today’s

competitive scenario where customer is the king, the banks have to charge them interest at a rate in accordance

with the RBI directives. Banks also compete in terms of annual fees for services like credit cards, DMAT etc.

With India’s economy progressing, there are more and more buyers seeking these loans but at a very

competitive interest rate. The interest rates will have a great impact on the investors while making the decision

for investment. There may be variation in interest rates according to the accounts. The investor will invest in the

bank where the risk is less. Interest rates play an important role for the investors while making the investment.

The pricing factor is very important because of the kind of competition that is prevailing today in the Indian

market. However it is very important to understand that in the banking sector, the main pricing policy is

concerned with the interest rate charged. This interest rate is however regulated by the RESERVE BANK OF

INDIA and THE INDIANBANKING ASSOCAITION. Any one particular bank or a group of banks does not

regulate it. The interest rate charged cannot be higher than that decide by the RBI and the INDIAN BANKING

ASSOCIATION.

The most favourable pricing strategy

This model shows a pricing strategy, which should be adopted in order to ensure maximum satisfaction to both

the bank as well as the customers. The price should be set in such a manner that the investor should be assured

that he is not being cheated or overcharged by the bank and at the same time the bank and investors are able to

reap maximum profits and returns. Such a pricing helps the bank to attract the investors and customers.

(Davis.T and Hahn.E.F 2003)

PLACE

Place mix is the location analysis for banks branches. There are number of factors affecting the determination of

the location of the branch of bank. It is not necessary that the bank should be situated at a location where most

of its target population is located apart from target population it should also concentrate on the rural and

development areas where the banking facilities are not available. Some of the important factors affecting the

location analysis of banks are the trade area, population characteristics, commercial structure, industrial

structure, banking structure, proximity to other convenient outlets, Real estate outlets, proximity to public

transportation, Drawing time, Location of competition, visibility and access. It is not necessary that all the above

conditions have to be satisfied while selecting the location but it should be tried to satisfy as many of them as

possible.(Gabott.M and Hogg.G 1998 )

PROMOTION:

Promotion is nothing but making the investor more and more aware of the services and benefits provided by the

bank. The banks today can use a lot of new technology to communicate to their investors. Two of the fastest

growing modern tools of communicating with the customers are: internet banking and mobile banking. This can

be better explained in private banks rather than public banks. As the private bank ICICI was first to use the

technology of internet banking and mobile banking.

ICICI was the first organization in India to provide Wireless Application Protocol (WAP) based services.

Mobile commerce using WAP technology, allows secure online access of the web using mobile devices. With

WAP one can directly access the ICICI WAP server, check one’s account details and use other value added

services. Thus different methods are used by different banks to promote its services.

A bank may have very attractive schemes to offer to their investors but they are of no use if they are not

communicated properly to the investors. Promotion is to inform and remind the individuals and persuade them

to accept, recommend or use of product, service or idea. However there some very important points that is to be

considered before the promotion strategy is made. These points are finalising the budget, making possible

creativity, testing the effectiveness. There are different ways of promotion like public selling, Personal selling,

Sales promotion, Internet.(Bonama.V.T and Mills.K.M 1980)

PEOPLE:

People are the employees that are the service providers. In a banking sector, the service provider plays a very

important and determinant role in rendering the customers a satisfactory and a good service. It is extremely

essential that the service provider should understand what the investors expect from them. In the banking sector,

the investor needs to be guided in a lot of matters, like which is the best product to invest in both private and

public sector banks, which is possible only with the help of the service provider.

The position in the eyes of the customer will be perceived by appearance, attitude and behaviour of the customer

contact employees. Not only does the customer contact employee influence the customer’s perception but also

the customer base of the organization does so. (Clow.E.K 2003)

PROCESS:

The process mix constitutes the overall procedure involved in using the services offered by the bank. It is very

necessary that the process is very customer friendly. In other words a process should be such that the investor is

easily able to understand and easy to follow without any hesitation. Today if particular banks formalities are

long and the procedure are very complicated the overall process fails and the investors may switch over to the

other banks. (Rust.T.R 1996)

PHYSICAL EVIDENCE:

Physical evidence is the overall layout of the place i.e. how the entire bank has been designed. Physical evidence

refers to all those factors that help make the process much easier and smoother. For example, in case of a bank,

the physical evidence would be the placement of the customer service executive’s desk, or the location of the

place for depositing cheques. It is very necessary that the place be designed in such a manner so as to ensure

maximum convenience to the customer and cause no confusion to him.(Nargundkar.R 2006)

2.6 The Concept of Perception

Using the sensory receptors and being influenced by external factors, the person receives information, accepts

and adapts it, forms his personal attitude, opinion and motive, which can be defined as factors that will influence

his further activity and behaviour. Perception within this context is considered as one of the principal personal

factors, conditioning the nature and direction of remaining variables.

J. C. Mowen (1987) determine perception as a phase of information processing, while C. G. Walters (2000),

define behaviour having features of the process and including separate phases of the process. C.G. Walters

(2001) characterize perception as a solid process during which an individual acquires knowledge about the

environment and interprets the information according to his/her needs requirements and attitudes. The works B.

Dubois (2000) present perception as a more complicated process, during which sensory receptors of a consumer

capture a message sent by external signals and the information received is interpreted, organized and saved,

providing a meaning for it and using it in a decision making process.

2.7 Customer Perception

Customer perception is an important component of maintaining relationship with the customers. Customer

satisfaction is a mental state which results from the customer’s comparison of expectations prior to a purchase

with performance perceptions after a purchase. A customer may make such comparisons for each part of an

offer called ‘‘domain-specific satisfaction’’ or for the offer in total called ‘‘global satisfaction’’ .Moreover, this

mental state, which they view as a cognitive judgment, is conceived of as falling somewhere on a bipolar

continuum bounded at the lower end by a low level of satisfaction where expectations exceed performance

perceptions and at the higher end by a high level of satisfaction where performance perceptions exceed

expectations.

Customers are the core focus of any organization and thus of prime importance to the banks. It is important for

the service providers to know the level of customer expectations so that they can meet and even exceed them to

gain maximum customer satisfaction. Hence understanding customer expectations is a prerequisite for

delivering superior service (Parasuraman et al., 1991). Service sector can provide the best services to their

utmost capabilities but if the customer does not perceive them to be of quality, all is in vain. Thus it is very

essential for the service provider to understand how customers can perceive the service as quality service and

carry a euphoric feeling. It is the task of the marketing people to understand the factors affecting customer

perception, elements of service quality and satisfaction to have a competitive edge and to create a perceptual

difference. If all these are considered and then the service provider targets the customers with a total service

experience, the customer perceives the service as quality service and spreads positive word of mouth. Thus

perception is one of the factors affecting customer satisfaction. (Zeithaml and Bitner, 2003)

Services are a series of activities and as the "product" is "missing" (Gronroos, 1998) the service quality forms an

important aspect in the perception of services as it has both marketing and operations orientations (Fitzsimmons

and Fitzsimmons, 2001). It can be used as a tool for differentiation and can provide a competitive edge. Service

quality is also crucial for developing loyal customers and is hence responsible for the success of any service

organization (Kandampully, 1998; 2000). The customers at the time of service delivery interact closely with the

service providers and get an inside knowledge of the service organization. This knowledge gives them an

opportunity to critically assess the service provided and the service provider. Thus service quality plays an

important role in adding value to the overall service experience. Also customers seek organizations that are

service loyal i.e. aim to provide consistent and superior quality of service for present and long term and

organizations aiming for this are bound to get customers' loyalty (Kandampully, 1998).

It is necessary for both the banks that they should understand the customer perceptions in order to retain the

customers. Due to competitive market the investors are attracted by the banks where they get the better returns.

With better understanding of customers' perceptions, banks can determine the actions required to meet the

customer needs. They can identify their own strengths and weaknesses, where they stand in comparison to their

competitors, chart out path future progress and improvement. Customer satisfaction measurement helps to

promote an increased focus on customer outcomes and stimulate improvements in the work practices and

processes used within the banks. ( Bhaskar Rao,2007)

2.8 INVESTMENT:

Investment is a form of saving in which an individual’s money can potentially generate a return. This return can

be in the form of income (like interest or dividends) or appreciation of the value of the lump sum invested.

Investment involves two key variables: ‘Risk’ and ‘Return’. The objective of successful investing is to

maximise the returns you can get for the level of risk you are prepared to take.(Ramsey.D 2004).

2.9 Investment Theory

The concept of investment theory is based on the consideration of number of factors which are associated with

the process of investing. The theory focuses on looking closely towards wide range of factors which guide in

choosing the right investments for particular goal or purpose. While there are approaches to investment theory

which involves employing a number of other theories as a part of the process, some economist breakdown the

task into four areas that just about anyone can grasp.

The first key factor is about the goals for the investment portfolio. The idea is to protect the investor from

downturns in one market by providing for upswings in value with other holdings by determining, how to

diversify the portfolio while still balancing that diversification with the type of individual securities,. It is known

as modern portfolio theory, this factor is key to the investment process for investors who have specific goals for

the income generated by the portfolio.

Another important aspect is based on evaluating investments based on the degree of risk and potential return.

The idea is to help the investor focus on options that carry an acceptable amount of risk while providing the

greatest amount of return. This element is the basis for the capital asset pricing model, and can make a big

difference in whether or not an investor makes the right choices for his or her portfolio. A similar approach,

known as the arbitrage pricing theory, focuses more on assessing the degree of risk associated with a

given investment option, but still serves the purpose of helping an investor decide if the potential return is worth

the volatility assosciated with a given option.

A well-crafted investment theory will also consider the amount of information available about both

the investment option and the general condition of the market or markets where the option is traded. It is known

as the efficient market hypothesis, this concept holds that all information that is relevant to making the decision

to hold, buy, or sell an option must be readily available to the investor in order for the market to be truly

efficient. Since knowing the past history, the current status, and the potential future risks associated with

any investment is key to being able to make wise choices, the investor should determine if this situation of an

efficient market exists before deciding to get involved with a given investment.

Essentially, an investment theory is all about making informed investment decisions. By taking into

consideration the goals and aims of the investor, it is possible to build a portfolio that will help meet those goals.

In order to wisely choose the right investments, it is important to know all there is to know about

the investment and the market in which it is traded. Developing an investment theory that encompasses all these

factors will greatly increase the chances for success, as well as aid the investor in avoiding investment options

that are not in his or her best interest.(Evenskey.H and Katez D.B 2002)

2.10 Factors involved in investment decision:

The main motive behind the investments is to make money and increase the monetary wealth. With so many

factors involved, investment decision is a complex. Small investors often go with more returns and less risky

when trying to choose among numerous alternatives to invest in Public banks or private banks. Big investors use

various analyzing techniques. Globalization and the growth of internet have introduced many new opportunities

and threats. When investing, investors are committing their assets for some time, that is why the investor need to

cover all aspects before making an investment decision (William.K,2007)

Expected Return:The most basic decisions in making investment revolve around the comparison of expected

return and risk involved.An investor will not likely to take higher risk if there is no chance of higher returns is

not equal. Investors strive to reach on the best trade-off point between risk and return which go well with their

financial requirements. These expected returns are not always equal to what an investor actually gets after some

time. The possibility that actual return will not be the same what they expect is called risk.

Risk Factor: it is rare to make investment which doesn't involve risk. Government securities come close to be

called risk free; but still have some risks attached. Risk actually is the balancing factor of the financial markets.

Various types of investment risk exist, such as financial risk, currency risk, inflation risk or capital risk are the

most common one. Different investors react differently to these risks. While majority of the investors are risk

averse, there are some investors who are seeking more risky ones with expectations of higher yields.

Investor's Hunch: Every investor will finish off with a different conclusion although the market, economy and

all statistical facts and figures are same for everyone. This difference comes from the investor's intuition. Some

will start from research; by collecting lots of information and then analyzing to decide, others start from

defining their objectives and then going for opportunities that suit their needs (William k,2007)

Globalization Factor: Investors have slowly started to realize the advantages of international investments. Some

banks present better returns while other banks provide lesser risks. Investors have often conquered risk by

diversification, and an international market provides more opportunities to achieve portfolio diversification as

compared to a local market. Ignoring global markets for investment is turning your back on a whole new world

of opportunities.(William.K,2007)

Investment risk pyramid - An investment pyramid represents three levels of investment. At the bottom of the

pyramid, low risk investment options are placed. In the middle portion of the pyramid, the investment options

have a greater risk associated with them. However, these investment options can give you better financial

returns than the extremely low risk ones. The third and the topmost portion consist of extremely high risk

investment options. Though the profit from such investments can be unbelievable, you also stand at a high risk

of losing your money due to volatile market conditions and overall nature of the economy. The low risk options

which form the base of the pyramid can include bank accounts such as fixed deposits and  savings accounts,

government bonds and debt instruments, cash, pension funds, money market accounts, treasury bills, notes, and

bills. The middle level of the investment pyramid consists of more risky investment options such as  real estate

investment, equities, mutual funds, direct stock investments, and some high income bonds. The most risky and

high rewarding options such as options, futures, collectibles, penny, and speculative stocks are placed at the top

of the investment risk pyramid. As we move up the pyramid, our risk goes on increasing and so does our

reward. You should think of what return on investment you will get before taking any investment decision. In

the next paragraph, let us understand how to make use of the investment risk pyramid to make a personal

investment portfolio. (Hopkins R.B and Blazek.J 2003).

INVESTING IN BANKS AND THEIR MOTIVES:

There are many ways to increase your income by investing savings and spending money wisely. If you have

started to set aside money, you may want to find a financial advisor to help you make financial decisions. This

may be a trusted friend or relative who handles their own money successfully, someone at a bank or financial

institute whom you trust, or a lawyer or stockbroker at a reliable company. Whomever you choose, be sure they

have a good reputation, are trustworthy, make you feel comfortable, can clearly show how they are handling

your money and what (if anything) they are charging you for. Above all, be sure that you keep control over your

money! Your advisor may make suggestions about how to handle your money, but you should know what is

happening to your money and make all final decisions (including deciding not to let the person handle your

money anymore if you aren't happy.)There are many ways to invest and spend money wisely. Below is a list of

some of the more common method used by the investors while investing in banks

Savings Accounts - As mentioned in other sections in this course, savings accounts are an easy way to make

your money work for you by earning interest. Talk to local banks about the different types of savings accounts

they have and what type of interest they offer.

CDs (Certificates of Deposit) - Many banks often offer Certificates of Deposit or CDs to their customers. The

advantage of CDs is that they usually give you a higher interest rate on your money than savings accounts. The

disadvantage is that you usually have to commit a certain amount of money (anywhere from 100 to thousands)

for a certain amount of time (anywhere from 6 months to several years) to earn that higher interest. While you

can have access to your money in case of an emergency, you usually lose the interest you are earning, so when

purchasing a CD, you want to be sure you can commit to the full length of time.