CUSTOMER EXPECTATIONS AND PERCEPTIONS ACROSS THE INDIAN BANKING INDUSTRY AND THE RESULTANT FINANCIAL IMPLICATIONS

Kirti Dutta Anil Dutta

The purpose of this paper is to study the expectations and perceptions of the consumers across the three banking sectors in India. It further delineates the factors affecting the quality perception of the customers in the banking sector and tries to corroborate this perception with the financial performance of the Banks. The paper presents the primary data of 263 respondents across the three banking sectors. To explore the customers perception of service quality factor analysis is done and factors affecting the Indian customers are highlighted. A study of the financial performance of the banks is also done to see if the perception of service quality has a consequence on the banks bottom line. It was found that in the banking sector it is the foreign banks which are perceived to be offering better quality of services followed by the private and then public banks. It was also found that these perceptions are reflected in the financial performance of the banks also. With the increasing competition amongst banks, the findings can act as a strategic tool to achieve competitive advantage and customer satisfaction. It is also an eyeopener for the banks to see the gap between customer expectation and perception regarding the quality of services rendered which should further act as a motivator to enhance reputation and gain customer loyalty. This will in turn give them the elusive competitive edge they are looking for.

INTRODUCTION

anking Sector is the backbone of any financial system and economy. Commercial banks play an important role in the development of underdeveloped/developing economies by mobilization of resources and their better allocation. Indian Banking System is regulated by the central bank of the country i.e. Reserve Bank of India (RBI), which was nationalized in 1949. RBI is the primary regulator for the banking sector and the government exercises direct and indirect control over banks through RBI to protect the depositors and to stabilize the banking system. Extensive powers have been conferred on RBI under the RBI Act, 1934, and Banking Regulations Act, 1949. In 1969 the government nationalized 14 major banks to break the ownership and control of few leaders of commerce and industry over the economic power and banking system. This also

Journal of Services Research, Volume 9, Number 1 (April-September 2009) 2009 by Institute for International Management and Technology. All Rights Reserved.

32 Customer Expectations and Perceptions enabled balanced geographical growth of banks especially in rural areas and small towns, which accounted for the majority of the population. Government as the owner of the banks decided the agenda for the banks and directed the flow of the credit .The focus changed from class banking to social banking (RBI, 2007a). This social transformation process though resulted in unprecedented expansion of banking and financial system. However the regulated business environment, poor quality of credit portfolio due to social lending without adequate safeguards against defaults, thin margins on social lending, disruptive tactics of trade unions, increasing number of loss making branches due to unmindful branch expansion in rural areas and other factors resulted in sacrifice of the service quality and the operational productivity and profitability of these organizations. The banks still managed to survive due to the regulated business environment which killed the scope for competition among banks. The Indian banking system has changed a lot over the last five decades especially in the last 15 years with India taking to the path of free market economy and globalization with clear commitments under WTO (World Trade Organization) regime. A journey from private ownership and control of commercial banks to government ownership and control by way of nationalization, has come in full circle in the wake of liberalization and introduction of new players in the shape of Private Sector Banks and Foreign Banks. Fresh induction of public stake and corporate governance in government owned banks has brought the element of stiff competition in the environment with greater adoption of the new technologies and ideas, renewed perception of service quality along with the high degree of professional management and marketing concepts in the Indian Banking system. Currently there are twenty eight public sector banks which account for 87% of the total bank branches (and 74% of deposits), twenty four private sector banks which account for 12% of the total bank branches (and 20% of deposits) and twenty nine foreign banks accounting for 0.45% of the branches (and 5.5% of deposits) (Indian Banks Association, 2007). The entry of foreign/private banks and various financial sector reforms like deregulation of interest rates, new norms on asset classification and provisioning, adoption of Basle Accord on capital adequacy coupled with other policy measures aimed at adopting best global
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practices has revolutionized the banking industry in India. The Public Sector Banks, which still account for the major part of the Indian Banking Industry in terms of size and reach are facing stiff competition from Private and Foreign Banks as also from the Non-Banking Financial Institutions. The Foreign Banks which form only 0.26 % of the total number of branches in India still manage to gather 5% of the total deposits. THE STUDY The growing competition and highly stressed profits have not only introduced the new marketing concepts in the Indian banking sector but has also brought the customer satisfaction to the center of the focus. It has become very important for the banks to retain their existing customer base as well as to enlarge the same. It is reported that 90% of bank switching in the Asian Banking market occurs due to pricing, service quality and inconvenience (Gerrard and Cunningham, 2004). Since pricing in Indian banks is regulated it is the service quality delivered which then becomes important if the banks want to retain and attract customers. Evaluation of judgement of service quality is necessitated by the fact that it can significantly influence bank loyalty (Lewis, 1993). Also a positive correlation exists between image, perceived quality, satisfaction, commitment and loyalty (Veloutsou et al., 2004). This paper aims to compare customers expectations and perceptions of service quality and bank performance between public, private and foreign banks and the overall service quality of banks in India. It then highlights the financial performances of the banks to see if banks that are offering higher service quality are also more profitable. LITERATURE REVIEW Customers are the core focus of any organization and thus of prime importance to the marketers. 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). Customers perception of service quality influences the consumer behaviour (Bitner, 1990) and intention (Henning-Thurau and Klee, 1997). Organizations can provide
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34 Customer Expectations and Perceptions 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; Zeithaml, 1988) 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). In the evaluation of services for the banking sector (due to regulations by RBI) there is not much differentiation in the service product and price. Thus the main differentiator for banking service evaluation would be ServQual dimensions, systematization of services, servicescape and social responsibility. Out of the main differentiators for the banking sector systematization of services would be covered in reliability and servicescape would be covered in tangibles. Thus this paper concentrates on the use of ServQual model to evaluate the banking sector similar to the survey among customers of private and public
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sector banks in Greece (Kangis and Voukelatos, 1997). Angelis, et. al. (2005) conducted a study to evaluate the customers perceived value of private and state-controlled Hellenic banks in Greece. Al-Tamimi and Jabnoun (2005) conducted a comparative study of the service quality and bank performance of UAE national and foreign banks using the ServQual instrument. Glaveli et. al. (2006) performed a study to evaluate the bank service quality from five Balkan countries helping in the development of operational, marketing and human resource strategies in the Balkan context. Sureshchandar et. al. (2003) carried out a study of customer perceptions of service quality of banking sector in India. They however did not focus on Servqual instrument to determine the customer perceived quality but used core service, human element, nonhuman element, tangibles of service and social responsibility for their study. Even though a number of such studies have been done in different countries the authors felt the need to replicate it in India as service quality determinants are context-specific and may be influenced by cultural and economic circumstances (Cui, et. al., 2004). Hence the need to study the service quality determinants in the Indian scenario and determine the validity and applicability of the same in the Indian context. The following hypotheses are therefore proposed: H1: There is no significant difference between customer expectations and customer perception of private banks regarding service quality. H2: There is no significant difference between customer expectations and customer perception of public banks regarding service quality. H3: There is no significant difference between customer expectations and customer perception of foreign banks regarding service quality. H4: There is no significant difference between the three groups of banks with respect to the expectations of the customers. H5: There is no significant difference between the three groups of banks with respect to the customers perception. The impact of service quality improvements on profit, ROQ (Return on Quality) and other financial outcomes is well documented (Rust et al., 1995; Chang and Chen, 1998; Zeithaml, 2000; Duncan and Elliott, 2002; Baker and Crompton, 2000 cited in Mohsin, 2005; Olorunniwo and Hsu, 2006; Gronholdt et. al., 2000). It would then be pertinent to see how the banks are performing financially. The following hypothesis is therefore proposed:
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36 Customer Expectations and Perceptions H6: There is no significant difference between the overall service quality and the banks financial performance in the three types of banks. METHODOLOGY, DATA COLLECTION AND SURVEY INSTRUMENT Secondary research was conducted and instruments used to measure service quality of banks in different countries were collected. Based on this a structured and non-disguised questionnaire was developed, keeping in mind the original service quality model (Parasuraman et al., 1988). A focus group was then conducted on bank employees to see if the factors taken were pertinent and the instrument was revised. A second focus group was then conducted on the customers to gauge their responses regarding the questionnaire and a further revision was carried out. Primary data was then collected using this pre-tested survey instrument. To measure the profitability of the different banks secondary data was collected from the published information at Reserve Bank of India website. Statistical analysis was done to derive the various results. The study entailed data collection in India. The sampling method can be descried as quota sampling, as care was taken to complete designed number of questionnaires from both sexes, age groups, income levels and employment status and representing each banking sector i.e. Public, Private and Foreign banks. Data was collected by personally contacting the respondents and explaining in detail about the survey. Care was taken to conduct interviews at different locations, on different days and at uniformly distributed time intervals in order to reduce location, date and time-related response bias. A total of 327 customers from different public, private and foreign banks were contacted and 263 correctly completed questionnaires were obtained from all categories of customers, the breakup of which is given in Table 1. The respondents were asked to name the bank they used most and assess the performance criterias on he basis of their expectations. They were then asked to assess their banks performance on each of the criteria of service quality on a seven-point Likert scale (ranging from 1 indicating strongly disagree to 7-indicating strongly agree) as proposed by Bahia and Nantel (2000). The survey instrument consisted of two major sections. Section I consisted of two sub-sections. Sub-section one measured the customers expectations regarding service quality for
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the banking sector and consisted of twenty items. The other sub-section measured the extent to which their current bank was engaging in the stated practice (20 items). Section two consisted of seven questions with an aim to capture the demographic profile of the respondents and consisted of two questions regarding the name of the current bank and the sector to which the banks belonged. This was done purely with the aim of capturing authentic data as many times customers were not aware whether their bank was a private/public/foreign bank or at times customers were reluctant to name their bank and so mentioned whether it was a private/public/foreign bank. Care was then taken to ensure at the time of data entry that they filled in the correct category of the bank. For this a list of different banks falling in different sectors was drawn from the Reserve Bank of India site (RBI, 2007b) and carried at the time of survey administration. Table 1: Descriptive Profile of Respondents (n=263)
Customer Characteristics 18-25 26-35 Age 36-45 46-55 56 and above M Gender F 12th Degree PG Education Masters Professional PhD Public Student Retired Employment Private Selfemployment Professional <15 16-25 26-35 36-45 Income 46-55 56-75 76-1 1.1 and above Public Banks Private Banks Foreign Banks 27% 36% 18% 40% 32% 46% 18% 18% 20% 11% 11% 13% 4% 2% 3% 50% 70% 57% 50% 30% 43% 0% 13% 8% 55% 31% 39% 10% 8% 12% 18% 16% 13% 14% 23% 17% 3% 9% 11% 45% 28% 55% 17% 20% 18% 3% 1% 1% 19% 33% 13% 13% 2% 4% 9% 4% 13% 8% 21% 24% 17% 14% 5% 10% 7% 7% 13% 16% 10% 15% 22% 8% 4% 1% 1% 5% 4% 11% 8% 30% 39%

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38 Customer Expectations and Perceptions

Data analysis was done using SPSS software. The statistical analyses methods employed were factor analysis, Cronbachs alpha and ANOVA test. Financial analysis of the banks was performed to study the profitability of the banks and secondary research was conducted for this. FINDINGS AND ANALYSIS Factor Analysis Factor analysis was performed to identify the key dimensions and respondent ratings were subject to principal axis factoring with varimax rotation to reduce potential multicollinearity among the items and to improve reliability on the data (see Table 2: Rotated Factor Matrix). Varimax rotation (with Kaiser Normalization) was converged in eight iterations. Twenty items were reduced to four orthogonal factor dimensions which explained 61.619% of the overall variance indicating that the variance of original values was well captured by these four factors. The tangible factor explained 49.445% of the total variance and had an eigen value of 9.395. The second factor Assurance explained 5.222% of the total variance and had an eigen value of 0.992. Third factor empathy explained 3.622% of the variance and had an eigen value of 0.688 and the fourth reliability explained 3.329% of the variance and had an eigen value of 0.633. Table 2: Rotated Factor Matrix

Q 19 Q 18 Q 17 Q 16 Q 15 Q8 Q9 Q1 Q7

Factor 1 Tangibles .800 .734 .696 .663 .521

.421

2 Assurance

3 Empathy

4 Reliability

.423

.706 .582 .551 .546

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Q7 Q 11 Q 10 Q 12 Q 13 Q 14 Q2 Q3 Q6 Q4 Q5

.546 .532

.451 .715 .689 .624 .553 .608 .605 .484 .470 .462

.455 .441 .405

Extraction Method: Principal Axis Factoring. Rotation Method: Varimax with Kaiser Normalization. a Rotation converged in 8 iterations

Reliability Test A measure of construct reliability (Cronbachs Alpha) was computed for each dimension to assess the reliability of the set of items forming that dimension. (see Table 3). These coefficients range from 0.847 to 0.8967. As a rule of 0.70 or more represent satisfactory reliability of the items measured. Thus the items measuring the dimensions appear to be sufficiently reliable. The factors thus worked out have been provided in Table 4. Table 3: Cronbachs

Dimensions Tangibles Assurance Empathy Reliability

Cronbachs 0.8967 0.847 0.853 0.845

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40 Customer Expectations and Perceptions Table 4: Factors for Service Quality- Indian Banking Sector
Resulting Dimension Factor 1: Tangibles Bank employees should pay attention to individual problems Employees look professional and are well dressed Bank should have modern equipment and technology Bank should look attractive from outside Interior of bank should be neat and convenient Factor 2: Assurance Should Provide quick and efficient service Staff should provide clear explanation of services Staff should be knowledgeable and possess necessary information on requested services Staff should provide services with high competence Opening hours should be sufficient and convenient Factor 3: Empathy Bank should have branches in convenient places. ATM machines should be easily available Branch you deal with should be easily accessible Bank should provide telebanking and internet banking facility Factor 4: Reliability Should handle your transaction accurately Bank should show sincere interest in solving your problems Staff should be willing to solve your problems Services should be provided promptly in the bank Staff should be polite and courteous Original Dimension Empathy Tangible Tangible Tangible Tangible

Reliability Assurance Assurance Assurance Empathy

Empathy Empathy Empathy Empathy

Reliability Reliability Responsiveness Responsiveness Assurance

Service Quality Gap Analysis The analysis shows that there is a major difference between the service quality expectation versus perception of the customers for all the banks. The details are as follows: Public Sector Banks As seen in Figure 1 (Customer expectation vs perception of service quality public sector banks) there is a considerable difference between the customer expectations and perceptions regarding service quality of public sector banks. Our null hypothesis is rejected and the alternate hypothesis i.e. there is a significant difference between the customer expectations and customer perception of private banks regarding service quality is accepted as in the comparison of the mean score values there
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is a significant gap (perception expectations) in case of Empathy followed by Reliability, Tangibles and Assurance (see Table 5: Mean and Standard Deviation for Public, Private and Foreign Banks). The standard deviation in the customer expectations is moderate but in case of perception the value of standard deviations is significantly high which shows customers have different perceptions regarding services offered by the banks.
Customer Expectation Vs Perception of Service Quality Public sector Banks
3 2.5 2 Mean 1.5 1 0.5 0 Tangibles Assurance Empathy Reliability Dimensions

Expectation Perception

Figure 1: Customer Expectation Vs Perception of Service Quality Public Sector Banks Table 5: Mean and Standard Deviation for Public, Private and Foreign Banks
Factors Tangibles Assurance Empathy Reliability Mean S.D. Mean S.D. Mean S.D. Mean S.D. Public Sector Banks Private Sector Banks Foreign Banks E P Gap E P Gap E P Gap 2.482 0.476 2.006 2.391 1.267 1.124 2.542 1.763 0.779 0.847 1.444 0.846 1.236 0.645 0.904 2.704 0.930 1.774 2.669 1.232 1.437 2.705 1.784 0.921 0.576 1.459 0.622 1.215 0.508 0.983 2.795 0.388 2.407 2.741 1.256 1.486 2.845 1.553 1.293 0.549 1.464 0.612 1.533 0.415 1.271 2.592 0.568 2.024 2.561 1.161 1.400 2.568 1.489 1.079 0.608 1.153 0.612 1.123 0.578 0.840

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42 Customer Expectations and Perceptions Private Sector Banks Public sector banks also exhibit difference between the customer expectations and perceptions regarding service quality (see Figure 2: Customer expectation vs perception of service quality private sector banks). Even though the gap is less in comparison to public sector banks but difference is between empathy followed by assurance, reliability and then tangibles (see Table 8). Thus our second null hypothesis is rejected and the alternate hypothesis i.e. there is a significant difference between the customer expectations and customer perception of public banks regarding service quality is accepted. The standard deviation for the customer expectations is again low but the same for customer perception is high yet lower in comparison to the public sector banks. This shows that the customers have similar perception with regards to services offered by the private banks.
Customer Expectation Vs Perception of Service Quality Private Sector Banks
3.000 2.500 2.000 Mean 1.500 1.000 0.500 0.000 Tangibles Assurance Empathy Reliability Dimensions Expectation Perception

Figure 2: Customer expectation vs perception of service quality private sector banks Foreign Banks It is observed that the foreign banks exhibit the minimum difference between customer expectations and perceptions in all the three categories of banks (see Figure 3: Customer expectation vs perception
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of service quality Foreign banks). Again it is empathy scoring the highest difference followed by reliability, assurance and tangibles.
Customer Expectation Vs Perception of Service Quality Foreign Banks
3.000 2.500 2.000 Mean 1.500 1.000 0.500 0.000 Tangibles Assurance Empathy Reliability Dimensions Expectation Perception

Figure 3: Customer expectation vs perception of service quality Foreign banks So we can again conclude that our third null hypothesis is rejected and the alternate hypothesis i.e. there is a significant difference between the customer expectations and customer perception of foreign banks regarding service quality holds. The standard deviation shows that for foreign banks the perception of service quality among customers is highly similar. Anova Test for Overall Service Quality Anova was performed to discriminate the three groups of banks with respect to customer expectation and customer perceived service quality. All customers from various categories of banks are expecting high degree of service quality as mean score for overall service quality is 2.7148 with a low value of standard deviation i.e. 0.5581. Customers somewhat agree with regard to service quality delivered by all the banks. However customers of public sector banks neither agree nor disagee i.e. neutral about the service quality offered by the banks. This shows a high degree of service quality gap 2.18 (=E-P =
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44 Customer Expectations and Perceptions 2.64-.46). In the case of Foreign Banks most of the people agree with the service quality offered by the bank. The service quality gap here is also lower at 0.79 (=E-P=2.83-2.04). (see table 6: Descriptive Statistics) Table 6: Descriptive Statistics
BANK Expectations Public Sector Banks Private Sector Banks Foreign Banks Total Perceptions Public Sector Banks Private Sector Banks Foreign Banks Total Mean Std. Deviation 2.6400 .6117 2.7011 .5729 2.8289 .4439 2.7148 .5581 .4600 1.3811 1.2529 1.2503 2.0395 .9301 1.1787 1.3767 N 100 87 76 263 100 87 76 263

Table 7: Tests of Between-Subjects Effects

Dependent Variable Corrected Model Expectation Perception Intercept Expectation Perception BANK Expectation Perception Error Expectation Perception Total Expectation Perception Corrected Total Expectation Perception I Source Type III Sum of Squares 1.566 108.442 1926.301 406.327 1.566 108.442 80.046 388.158 2020.000 862.000 81.612 496.601 df 2 2 1 1 2 2 260 260 263 263 262 262 Mean F Square .783 2.543 54.221 36.319 1926.301 6256.866 406.327 272.170 .783 2.543 54.221 36.319 .308 1.493 Sig. .081 .000 .000 .000 .081 .000

a R Squared = .019 (Adjusted R Squared = .012) b R Squared = .218 (Adjusted R Squared = .212)

In table 7 (Tests of between-subjects effects) it is observed that the fourth hypothesis i.e. there is no significant difference between the three groups of banks with respect to the expectations of the customers is accepted as F (2, 260) =2.543, p>0.05.
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In the case of fifth hypothesis i.e. there is no significant difference between the three groups of banks with respect to the customers perception, is rejected as F(2, 260)=36.319, p<0.05. In other words there is a significant difference between the three groups of banks with respect to the customers perception. ANALYSIS OF FINANCIAL PERFORMANCE OF THE BANKS For the sixth hypothesis i.e. there is no significant difference between the overall service quality and the bank performance in the three types of banks the financial analysis of the banks was carried out. An overview of the key performance parameters of private, public and foreign banks in India can be obtained from Table 8. Table 8: Key Performance Parameters (Rupees in Hundred Thousands)
Avg. Business per Employee Avg. Profit Per employee Avg. Return On assets (%age) Non Interest Income as %age of Total Income Net NPA Ratio # Public Sector Banks 2005-06 2006-07 366.61 470.99 2.22 *0.87 **0.89 13.24 2.76 *0.86 **0.94 11.05 Private Banks 2005-06 2006-07 670.67 697.75 4.51 0.89 18.70 4.69 0.94 17.90 Foreign banks 2005-06 2006-07 955.41 995.08 13.89 2.08 30.38 16.46 2.27 27.79

*1.75 *1.10 1.05 1.00 **1.27 ** 1.00 Source : Based on Reserve Bank of India data (www.rbi.org.in) # Public sector Banks include SBI & Associates * Figures for SBI & Associates ** Figures for PSUs other than SBI & Associates

0.82

0.80

The assessment of the customer satisfaction for the subject categories of the banks was conducted on a sample size of 263. In this era of multiple banking and use of multiple delivery channels by the banking customers it is borne (from this survey) that service quality led to quality business and there is a significant co-relation between quality of customer service and customer acquisition which is major determinant of business volumes which ultimately gets reflected in key performance parameters.

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46 Customer Expectations and Perceptions VALIDATION OF SURVEY FINDINGS THROUGH KEY PERFORMANCE PARAMETERS: The Public Sector Banks, which still account for the major part of the Indian Banking Industry in terms of size and reach are facing stiff competition from Private and Foreign Banks as also from the NonBanking Financial Companies. The Foreign Banks which form only 0.45 % of the total number of branches in India still manage to gather 5.50% of the total deposits. Our findings from the statistical analysis show that customers of public sector banks neither agree nor disagee i.e. are neutral about the service quality offered by the banks. In the case of Foreign Banks most of the people agree with the service quality offered by the bank. This has been validated against following key performance parameters: Return on assets: Average return on assets in case of Public sector banks is the lowest among the three groups with Private banks doing better then Public sector banks, but the same is highest in the case of foreign banks, which is 2 to 2.5 times higher than Public sector banks. Business per employee: Average business per employee of Private banks is about 1.5 times that of Public sector banks, where as Foreign banks have more than double of business per employee in comparison to Public sector banks. Profit per employee: Average profit per employee is highest in case of Foreign banks followed by Private Sector banks. It is lowest in case of Public Sector Banks. Non Interest Income on services other than lending is highest in the case of Foreign Banks followed by Private Sector Banks. It is lowest in the case of Public Sector Banks. Net NPA level: Due to quality business foreign banks have been able to manage a low level of Net NPA ratio in comparison to Private Sector banks and Public sector banks. Foreign banks have a very small network of branches yet they have managed to garner comparatively higher share of total business, better business and profitability per employee and return on assets and lower level of Net NPA ratio. For the better Customer Service Foreign Banks adopted technology early and have been offering multiple delivery channels. Similarly private sector banks are ahead of Public

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Sector banks. This financial analysis shows that banks rating higher in service quality (from the current study) are also performing better financially thus proving our sixth hypothesis as correct. CONCLUSIONS AND RECOMMENDATIONS The statistical analysis through factor analysis and Cronbachs Alpha shows that there exists a gap between the customer expectations and perceptions in the Banking sector. The expectations of bank customers is higher than their perceptions as suggested by Parasuraman et al. (1988). This gap varies across the banking sector with public sector banks showing the widest gap and Foreign banks showing a narrow gap. Factor analysis showed that tangible, assurance, empathy and reliability dimensions are the explanatory variables predicting customer satisfaction in India. Tangibles have the highest impact on overall customer satisfaction. The largest discrepancy between the customer expectations and perceptions is in terms of empathy which includes Bank locations and ATM machines in convenient places and telebanking and internet banking facility. This is the major source of concern for Indian banking industry as a huge service quality gap exists for all the banks in this category. The findings from the statistical analysis show that customers of public sector banks neither agree nor disagee i.e. are neutral about the service quality offered by the banks. Apart from empathy they need to focus on reliability and tangibles as customers today are looking for tele-banking and internet banking facilities and aesthetics is also a key determinant of service quality. A limitation of this study is that the overall standard deviation for the customer perception is very high. This study thus needs to be extrapolated for getting a more conclusive proof about the customer perception. REFERENCES
Al-Tamimi, H.A.H. and Jabnoun, N. (2005) Service quality and bank performance: a comparison of the UAE national and foreign banks, Finance India, 20:1, 181-197. Angelis, V.A., Lymperopoulos, C. and Dimaki, K. (2005) Customers perceived value for private and state-controlled Hellenic banks, Journal of Financial Services Marketing, 9:4, 360-374. Bahia, K. and Nantel, J. (2000) A reliable and valid measurement scale for perceived service quality of bank, International Journal of Bank Marketing, 18:2, 84-91.

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Bitner, M.J. (1990) Evaluating the service encounters: The effects of physical surrounding and employee reactions, Journal of Marketing, 54:2, 69-82. Cui, C.C., Lewis, B.R. and Dong, X. (2004) Employee and customer perceptions of service quality: match or mismatch? A study of Chinese retail banking, Journal of Asia Pacific Marketing, 3:1, 24-42. Chang, T.Z. and Chen, S.J. (1998), Market orientation, service quality and business profitability: a conceptual model and empirical evidence, The Journal of Services Marketing, 12:4, 246-264. Duncan, E. and Elliott, G. (2002) Customer service quality and financial performance among Australian retail financial institutions, Journal of Financial Services Marketing, 7:1, 2542. Fitzsimmons, J.A. and Fitzsimmons, M.J. (2001) Service Management: Operations, Strategy and Information Technology (3rd Edn), Boston, McGraw-Hill Inc. Gerrard, P. and Cunningham, J.B. (2004) Consumer switching behavior in the Asian banking market, Journal of Services Marketing, 18:3, 215-223. Glaveli, N., Petridou, E., Liassides, C. and Spathis, C. (2006) Bank service quality: evidence form five Balkan countries, Managing Service Quality, 16:4, 380-394. Gronholdt, L., Martensen, A. and Kristensen, K. (2000) The relationship between customer satisfaction and loyalty: cross-industry differences, Total Quality Management, 11:4-6, S509-S514. Gronroos, C. (1998) Marketing services: the case of the missing product, The Journal of Business and Industrial Marketing, 13:4/5, 322-336 Hennin-Thurau, T. and Klee, A. (1997) The impact of customer satisfaction and relationship quality on customer retention: a critical assessment and model development, Psychology and Marketing, 14:8, 737-764. Indian Bankers Association, (online) (cited 13th Septermber, 2007) Available from <URL:http:/ /www.iba.org.in>. Kandampully, J. (1998) Service quality to service loyalty: a relationship which goes beyond customer services, Total Quality Management, 9:6, 431-444. Kandampully, J. (2000) The impact of demand fluctuation on the quality of service: a tourism industry example, Managing Service Quality, 10:1, 10-18. Kangis, P. and Voukelatos, V. (1997) Private and public banks: a comparison of customer expectations and perceptions, International Journal of Bank Marketing, 15:7, 279-287. Lewis, B.R. (1993) Service quality: recent developments in financial services, International Journal of Bank Marketing, 11:6, 19-25. Mohsin, A. (2005) Service quality perceptions: an assessment of restaurant and caf visitors in Hamilton, New Zealand, The Business Review, Cambridge, 3:2, 51-57. Olorunniwo, F. and Hsu, M.K. (2006) A typology analysis of service quality, customer satisfaction and behavioral intentions in mass services, Managing Service Quality, 16:2, 106-123. Parasuraman A., Zeithaml, V.A. and Berry, L.L. (1988) SERVQUAL: a multiple-item scale for measuring consumer perceptions of service quality, Journal of Retailing, 64:1, 12-37. Parasuraman A., Zeithaml, V.A. and Berry, L.L. (1991) Understanding customer expectations of service, Sloan Management Review, 32:3, 39-48.

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RBI (Reserve Bank of India), (2007a) (online) (cited on December 24th, 2007), available from <URL http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/81434.pdf>. RBI (Reserve Bank of India) (2007b) (online) (cited on July 24th, 2007) Available from <URL http://www.rbi.org.in/rbi-sourcefiles/annualdata/bs_annualdata.aspx>. Rust, R.T., Zahorik, A. and Keiningham, T.L. (1995) Return on quality (ROQ): making service quality financially accountable, Journal of Marketing, 59:2, 58-71. Sureshchandar, G.S., Rajendran, C. and Anantharaman, R.N. (2003) Customer perceptions of service quality in the banking sector of a developing economy: a critical analysis, The International Journal of Bank Marketing, 21:4/5, 233-241. Veloutsou, C., Daskou, S. and Daskou, A. (2004) Are the determinants of bank loyalty brand specific?, Journal of Financial Services Marketing, 9:2, 113-125. Zeithaml, V.A. (1988) Consumer perceptions of price, quality and value: a means-end model and synthesis of evidence, Journal of Marketing, 52:3, 2-20. Zeithaml, V.A. (2000) Service quality, profitability and the economic worth of customers: what we know and what we need to know, Journal of Academy of Marketing Science, 28:1, 67-86. Zeithaml, V.A. and Bitner, M.J. (2003) Services Marketing, New Delhi, Tata McGraw-Hill Publishing Company Limited.

Kirti Dutta, is presently working as Assistant Professor with IIMT, Oxford Brookes University, Gurgaon. Anil Dutta, a banker, has more than 26 years of experience in the banking industry. Currently he is involved in overseas expansion of the Punjab National Bank (a public sector bank).

Journal of Services Research, Volume 9, Number 1 (April-September 2009)