09 - Chapter 3

CHAPTER III
OVERVIEW OF BANKS AND CUSTOMER USAGE BEHAVIOUR
3.1. INTRODUCTION
Without a sound and effective banking system in India and it cannot have a
healthy economy .The banking system in India should not be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors. For the past three decades Indian banking system has
several outstanding achievements to its credit. The most striking features are its
extensive reach. It is no longer confined to metropolitans or cosmopolitans in fact.
Indian banking system has reached even to the remote corners of the country.
This is the main reason for India’s growth process
3.2. BANKING IN INDIA
Banking in India originated in the first decade of 18th century with
The General Bank of India coming into existence in 1786. This was followed by
Bank of Hindustan. The oldest bank in existence in India is the State Bank of India
being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of
decades later, foreign banks like Credit Lyonnais started their Calcutta operations
in the 1850s. At that point of time, Calcutta was the most active trading port,
mainly due to the trade of the British Empire, and due to which banking activity
took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.
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By the 1900s, the market expanded with the establishment of banks such as
Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai -
both of which were founded under private ownership. The Reserve Bank of India
formally took on the responsibility of regulating the Indian banking sector from
1935. After India's independence in 1947, the Reserve Bank was nationalized and
given broader powers
3.3. EARLY HISTORY
At the end of late-18th century, there were hardly any bank in India in the
modern sense of the term. At the time of the American Civil War, a void was
created as the supply of cotton to Lancashire stopped from the Americas. Some
banks were opened at that time which functioned as entities to finance industry,
including speculative trades in cotton. With large exposure to speculative ventures,
most of the banks opened in India during that period could not survive and failed.
The depositors lost money and lost interest in keeping deposits with banks.
Subsequently, banking in India remained the exclusive domain of Europeans for
next several decades until the beginning of the 20th century. The Bank of Bengal,
which later became the State Bank of India.
At the beginning of the 20th century, Indian economy was passing through
a relative period of stability. Around five decades have elapsed since India's First
war of Independence, and the social, industrial and other infrastructure have
developed. At that time there were very small banks operated by Indians, and most
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of them were owned and operated by particular communities. The banking in India
was controlled and dominated by the presidency banks, namely, the Bank of
Bombay, the Bank of Bengal, and the Bank of Madras - which later on merged to
form the Imperial Bank of India, and Imperial Bank of India, upon India's
independence, was renamed the State Bank of India. There were also some
exchange banks, as also a number of Indian joint stock banks. All these banks
operated in different segments of the economy. The presidency banks were like
the central banks and discharged most of the functions of central banks. They were
established under charters from the British East India Company. The exchange
banks, mostly owned by the Europeans, concentrated on financing of foreign
trade. Indian joint stock banks were generally undercapitalized and lacked the
experience and maturity to compete with the presidency banks, and the exchange
banks. There was potential for many new banks as the economy was growing.
Lord Curzon had observed then in the context of Indian banking: "In respect of
banking it seems we are behind the times. We are like some old fashioned sailing
ship, divided by solid wooden bulkheads into separate and cumbersome
compartments." Under these circumstances, many Indians came forward to set up
banks, and many banks were set up at that time, a number of which have survived
to the present such as Bank of India and Corporation Bank, Indian Bank, Bank of
Baroda, and Canara Bank
The period during the First World War (1914-1918) through the end of the
Second World War (1939-1945), and two years thereafter until the independence
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of India were challenging for the Indian banking. The years of the First World
War were turbulent, and it took toll on many banks which simply collapsed despite
the Indian economy gaining indirect boost due to war-related economic activities.
At least 94 banks in India failed during the years 1913 to 1918.
3.4. STRUCTURE AND EVOLUTION OF THE INDIAN BANKING SECTOR
An attempt has been made here to understand the nature of the banking
industry by analyzing the history of Indian banking. This section per iodizes the
development of banking in India into different phases by describing the
characteristic features of each stage. It describes briefly the chequered history of
banking in India—dominated by bank failures and mergers and the disappearance
of small private banks—and also examines other developmental aspects. It also
looks at the impact of RBI on industrial growth. The chapter also examines the
industrial growth and consequently its impact on banking instability.
The historical trends in banking instability are also discussed. Lessons are drawn
from the history of banking deregulation.
3.4.1. DEVELOPMENT OF BANKING IN INDIA: DISTINCT PHASES
There are two major phases in the history of banking in India, the early
phase and the historical phase. The early historical phase covers the period until
independence. The first part of the historical phase stops short of the current
period of deregulation, and the second part consist of current developments arising
out of deregulation. Four broad phases have been described:
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• Early historical and formative period: 1770–1905
• Pre-independence period: 1906–46
• Post-independence regulated period: 1947–93
• Post-independence deregulated period from 1993 onwards.
3.4.1.1. EARLY HISTORICAL AND FORMATIVE PERIOD: 1770–1905
The first phase of the history of modern banking in India was not
characterized by any kind of banking regulation. The development of banking in
the country was in accordance with the policy of laissez faire. English traders
could not make much use of indigenous bankers owing to their ignorance of the
indigenous bankers’ language as well as the indigenous bankers’ inexperience of
English trade. Hence, the English agency houses in Calcutta and Bombay began to
conduct their banking business based on unlimited liability. A new type of
business organization was evolved during the period from 1834 to 1847.
The managing agency system came into existence when an agency house first
acquired control over the management of a company.
The primary concern of agency houses was trade, but they branched out
into banking to facilitate the operations of their main business. The English agency
houses had no capital of their own, and hence were totally dependent on deposits.
They financed the movements of crops, issued paper money, and established joint
stock banks. The Hindustan Bank was established by one of the agency houses in
Calcutta in 1770. The General Bank of India and the Bengal Bank were
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established in 1785. These banks were chartered by the East India Company and
were followed by the three Presidency banks and the Indian joint stock banks.
The Bank of Calcutta was established in 1806 and received its charter as the Bank
of Bengal in 1809. The Banks of Bombay and Madras were the other two
Presidency banks; they were established in 1840 and 1843 respectively. The first
bank failure took place in 1791, when the General Bank of India was voluntarily
liquidated because of its inability to earn profits following the currency
difficulties in 1787 (Desai 1987). The Bengal Bank failed around 1791 due to the
difficulties of a related firm. The nexus between trade and banking continued to
sound a warning bell for many more banks. The real stimulus to the establishment
of joint stock banks was provided by an act passed in 1813 removing all
restrictions on Europeans settled in India. English agency houses established a
number of banks, which conducted ordinary banking business, financed internal
trade, and issued notes.
The American Civil War cut off the supply of American cotton to England,
which caused an unprecedented boom in India’s cotton trade with England. Many
banks and different kinds of companies were formed to take part in this activity.
But all of them failed within a short time, and public confidence in banks was
destroyed. The currency confusion in the period 1873–93 led to trade
uncertainties.
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3.4.1.2. PRE-INDEPENDENCE PERIOD: 1906–46
This phase saw the entry of new banks until the establishment of the
Reserve Bank of India (RBI) in 1935. There was an explosion of banking activity
and many small indigenous banks were established. The Indian Companies Act
was passed in 1913, but it was not adequate for the regulation of banking activity.
Consequently, the post-Swadeshi movement boom ended in a banking crisis
during 1913–17. The majority of the small and weak banks failed, resulting in the
weakening of public confidence in Indian joint stock banks. The boom during the
later years of World War I further resulted in the setting up of new banks.
A number of banks were established to finance industries. But from 1922
onwards, the number of bank failures increased because of economic depression.
Bagchi (1972) argues that the monetary arrangement in India was geared entirely
to meet the requirements of trade. In the absence of any industrial banking, the
commercial banks provided finance to industries. But they were allowed to engage
only in short-term lending. The high risk in lending to potential investors for
working capital was reflected in excessive interest rates because of high-risk
premiums.
To meet this demand, a number of banks came up in western India, Punjab,
and the United Provinces. They conducted their business in violation of even the
most elementary principles of banking. Keynes has attributed the vulnerability of
Indian banks to undercapitalization, inadequate cash reserves, and speculative
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proclivities (Keynes, 1913). The deficiency of capital made the newly established
banks wholly dependent on deposits. Keen rivalry among them to attract deposits
led to the luring of depositors while paying higher rates of interest.
The banks employed the funds provided by depositors in hazardous
enterprises in order to pay the high interest rates. In contrast, the Presidency banks
followed a cautious lending policy and lent only to established houses.
Many directors and managers were incapable and had little knowledge of banking.
Their intention was to make a quick buck. Large sums were locked up in
speculative dealings in silver, pearls, and other commodities. Long-term businesses
were financed without a proper enquiry into their soundness. These men supplied
some long-term capital to new investors in the form of indefinite extensions of
short-term loans. A disproportionate share of the total available funds was
frequently sunk into a single business. Funds were lent on the security of the
lending banks’ own shares. While these banks had an impressive amount of
authorized capital, the subscribed capital was smaller and the paid-up capital was
even smaller. Thus, the lack of a regulatory framework helped the banks to
deceive the public. Many managers resorted to absolute dishonesty, fraud, or
criminal mismanagement, and continued operating in collusion with the auditors.
Bank directors and managers lent the funds to themselves or to those concerns in
which they were directors or partners. They made away with the assets of the
banks by showing debt on their books. To hide evidence of mismanagement and
fraud, the accounts were either left incomplete or were falsely made up. Balance
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sheets were presented with considerable window dressing. There were instances of
the dividend being paid out of the capital and deposits. Cash reserves were
maintained at a very low level. There was no cooperation among the Indian joint
stock banks and the Presidency and exchange banks. For instance, the Bank of
Bengal refused to lend to banks in Lahore. Each bank conducted business in its
own fashion.
The banking crisis of 1913–17 clearly showed the defects of the system.
In 1898, the Fowler Currency Committee advocated the establishment of a central
bank. However, this recommendation did not find favour with the Government of
India. Nevertheless, public opinion in India began to strongly support the creation
of a central bank. In 1926, the Hilton Young Currency Commission recommended
the creation of a separate bank, to be called the Reserve Bank of India, intended to
perform central banking functions. Bank failures in south India drew attention to
the need for strict control over banks. Rates of interest on fixed deposits dropped.
Inflated prices of durable assets like gold, shares, and real estate strengthened the
desire of the public to hold liquid assets. Deposit growth slowed down because
savings were used as working capital. A number of banks were liquidated during
the period 1939–42, followed by the rapid expansion of banks during the period
1942–46. Huge funds found their way into old banks. The lowering of the interest
rate on deposits had an adverse impact on profitability. The drawbacks of this
phase were as follows: indiscriminate branch expansion, inadequacy of paid-up
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capital, manipulation by management in the issuing of shares, acquisition of
control of non-banking companies, interlocking of banks and other concerns,
undesirable manipulation of accounts, and the utilization of profits.
3.4.1.3. POST-INDEPENDENCE REGULATED PERIOD: 1947–68
All economic development in the post-independence period took place in a
planned way under the five-year plans. The economy experienced a foreign
exchange crisis during the Second Plan. To streamline the functioning and
activities of commercial banks, the Government of India adopted the Banking
Companies Act, 1949, which was later changed to the Banking Regulation Act,
1949 as per the amendment of 1965. As the central banking authority, the Reserve
Bank of India was vested with extensive powers for the supervision of banking in
India to safeguard the interests of customers.
During this period, public confidence in banks declined. As a result,
deposit mobilization was slow. People thought that the savings bank facility
provided by the Postal Department was comparatively safe. Therefore, banks
preferred to lend their funds to the traders. After independence, RBI was
nationalized and given more powers. As a result, the banking industry was
organized for the first time on certain uniform parameters. In the early 1950s,
banking concentrated primarily on lending to trade and commerce. In 1952, the
government weeded out the financially weak banks. The banks were largely urban
oriented and remained beyond the reach of the rural population. A large
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percentage of the rural population had to depend mainly on moneylenders as their
main source of credit. Rural penetration by banks was highly inadequate, as
agriculture was hardly considered an economic activity. The focus of the banks
was on short-term credit. In 1955, the State Bank of India was nationalized.
In 1959, SBI subsidiaries were nationalized. SBI and its subsidiaries increased
their rural base substantially during the decade of the 1960s but were unable to
meet the banking and credit requirements of the country. Nevertheless, the
banking system began to gain the confidence of the public. However, the crash of
the Palai Central Bank in Kerala in 1960 shook public confidence in the banking
system. In 1961, insurance cover was extended to deposits. The country faced the
Sino–Indian war in 1962. In 1963, as per the Banking Companies Act, RBI
acquired the powers to exercise control over the affairs of the banks of particular
groups of persons, to regulate loans, advances, and guarantees given by banks, and
to appoint and remove bank personnel.
In 1966, the cooperative banking system was brought within the statutory
supervision and control of RBI The experience gained over the years revealed that
the private sector banks did not contribute much towards the economic growth of
the country. Hence, the nationalization of the fourteen major commercial banks
was undertaken in 1969 with the aim of channeling the financial resources of the
banking industry. Bank nationalization marked the beginning of the expansionist
phase of the Indian banking industry.
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The stated reason for bank nationalization was the need for exercising
greater control over credit delivery. The main objectives were growth, reduction in
regional imbalance of economic activity, making the banking system reach out to
ordinary people in rural areas, extending banking facilities to areas not served by
banks, and meeting the credit requirements of agriculture, small-scale industry,
and other neglected sectors of the economy. The two subsequent decades
witnessed a massive expansion of the banking system to the hilly tracts and tribal
areas and to every nook and corner of the country. The purpose was to move from
class banking to mass banking. The areas of focus were Lead bank scheme, district
credit plans, and priority sector lending to weaker sections and lending under
differential rate of interest schemes. The policy prescription of the government
coupled with the Green and White Revolutions of the 1970s substantially
increased the production of agriculture and allied activities. The easy availability
of credit kindled the spirit of entrepreneurship among the masses, leading to the
growth of retail trade, small businesses, and professional activities, self-employed
individuals, transport operators, and village, cottage, and small-scale industries
throughout the country. The trends were so encouraging that the government decided
to set up regional rural banks in 1976 for developing the rural economy. However, all
these developments could not ensure the balanced development of all regions.
As a result, the service-area approach was adopted in the 1980s wherein all
the villages were allocated to specific banks for easy accessibility of banking
services. Another striking feature of this phase was the dominance of social
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considerations over commercial considerations, which led to compromises in the
quality of credit, leading to poor profitability of the banks and thus resulting in the
booking of losses by the nationalized banks in the late 1980s and the early 1990s.
The nationalized banks worked in a bureaucratic manner, leaving customers with
limited options. The years 1985–90 are regarded as a period of consolidation for
the banking system. The early 1990s witnessed economic change at the national
and international levels through the adoption of the agreements of the World Trade
Organization (WTO) and the General Agreement on Tariff and Trade (GATT).
These changes forced the developing and the developed countries to liberalize
their economies. Thus, with the liberalization and deregulation of the economy,
the Indian banking sector entered another phase in its development.
3.4.1.4. POST-INDEPENDENCE DEREGULATED PERIOD:1993 ONWARDS
Until the 1990s, more than 92 per cent of business was in the hands of the
public sector banks. Financial sector reforms introduced in the early 1990s paved
the way for the emergence of a strong financial system in India. It ultimately led to
the acceptance of sound accounting practices, adequate provisioning, transparency,
and more disclosures in the balance sheets of banks. The reforms emphasized the
commercial character of the banking system. Interest rates were entirely freed and
the RBI induced the capital–adequacy ratio as per the recommendations of the
Basle Committee. The reforms also prompted and intensified competition in the
banking sector. This phase was characterized by the geographical and numerical
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proliferation of bank branches. It also witnessed some weaknesses, such as low
profitability, poor customer service, mounting non-performing assets, and
overstaffing. The spread of the rural branch network also shrank and the number
of borrower accounts declined. The credit–deposit ratio in rural and semi-urban
areas has also declined since 1990. This indicates that banking has moved away
from the common man. Keeping in mind the high cost of operations and low
profitability, banks desisted from lending to the weaker sections of society and
instead concentrated on courting large corporate borrowers. In order to make
Indian banks more competitive, profitable, and vibrant, financial sector reforms
were implemented in 1991 based on the recommendations of the Narsimhan
Committee.
This phase witnessed the liberal entry of private and foreign banks in 1993,
operational freedom of banks, deregulation of interest rates, etc. These changes
induced competitiveness in the banking sector, and profitability became the core
objective. During this phase, the nationalized banks started rationalizing their
network by shifting, merging, and closing down the non-viable branches. Banks
switched over to mass computerization for handling the increased volume of
business and improved consumer satisfaction. The profit margins of banks
declined considerably on account of the slashing of interest rates and increased
customer expectations. Banks became more customers focused because of the
prevailing competition. Finally, voluntary mergers took place because of low
profitability and increased competition. To cope with these pressures, banks

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became customer friendly and introduced tailor-made products suited to various
segments of the population. In the early 1990s, the government embarked on a
policy of liberalization and gave licence to a small number of private banks,
referred to as the new-generation tech-savvy banks. The number of foreign banks
in the country increased substantially during the 1990s. This phase saw the
introduction of many more products and facilities in the banking sector. India is
now flooded with foreign banks and their ATM counters. Efforts are being made
by the banks to provide satisfactory service to customers. Phone banking and net
banking have been introduced and many customers are benefiting from these
services. The entire banking system has become more convenient and speedy.
Time is assigned more importance than money by the banks. There is a flexible
exchange-rate regime, foreign currency reserves are high, capital account is not
yet fully convertible, and banks and their customers have limited foreign-exchange
exposure. The share of public sector banks has declined substantially and is expected
to decline even further. Competition has awakened banks to the need for introducing
the latest technology, improving efficiency, and providing quality services.
3.4.1.5. CURRENT PHASE OF THE BANKING VISION: 2002 to 2008
The forces of globalization and technological change have resulted in the
increasing integration of economies across the world. Today, banks are not only
competing locally but also globally. The latest banking, which is reaping the
benefits of these developments, is knowledge-oriented and technology-driven
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banking. Under this regime, there is hardly any paper banking, the banks are slim
and trim in their physical size and structure, business volume is very large, and
customer–banker contact is reduced to the bare minimum and it is fully electronic.
Customer service and product innovation are the guiding principles and strengths
of these banks. Customers can choose from a wider range of products. Banks are
concentrating on multi-channel delivery. They have become a delivery channel for
a host of financial products and services, such as insurance, hire purchase, leasing,
consultancy, and shares. Risk-management activities are more prominent in the
current banking system. Nowadays banks have become more customer-centric
institutions. Financial liberalization has enhanced the efficiency and productivity
of banks by creating a competitive and flexible environment. As a result, banks are
themselves setting interest rates for their assets and liabilities. Banking in India
seems to have finally grown up in terms of supply, product range, and reach.
Nevertheless, it still remains a challenge for private sector and foreign banks to
penetrate rural India.
Earlier, account holders had to wait for hours at the bank counter for getting
a draft or for withdrawing their own money. A cheque from one state in the north
used to take nearly a month for clearance at a bank located in the south. Today,
Customers have a wide array of choices. Money can be transferred from one
branch to another in minutes. Banks are offering additional services to their
customers. The Indian banking industry is currently passing through a phase that
may be described as a customers’ market. Customers have more options in

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choosing their bank. With stiff competition and technological advances, banks
have been compelled to offer services that are easier and more convenient.
After decades of excessive government regulations and restrictions, financial
liberalization has resulted in substantial changes in the banking sector. The sector
has now become relatively less state-directed, more competitive, and more open to
foreign banks and non-bank financial institutions. Today, the shares of the leading
public sector banks are being listed on stock exchanges. Banks have now
reoriented themselves to adopting new-style banking norms. As a result of these
consistent efforts, the banking system in India has visibly improved.
Currently, banking in India is generally fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge
for the private sector and foreign banks. In terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets relative to other banks in comparable economies in its region.
The Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage
volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite
some time-especially in its services sector-the demand for banking services,
especially retail banking, mortgages and investment services are expected to be
strong. One may also expect Merger and Acquisition, takeovers, and asset sales
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In March 2006, the Reserve Bank of India allowed Warburg Pincus to
increase its stake in Kotak Mahindra Bank to 10 per cent. This is the first time an
investor has been allowed to hold more than 5 per cent in a private sector bank
since the RBI announced norms in 2005 that any stake exceeding 5 per cent in the
private sector banks would need to be vetted by them
Currently, India has 88 Scheduled Commercial Banks (SCBs) - 28 public
sector banks i.e. with the Government of India holding a stake, 29 private banks
these do not have government stake; they may be publicly listed and traded on
stock exchanges and 31 foreign banks. They have a combined network of over
53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a
rating agency, the public sector banks hold over 75 per cent of total assets of the
banking industry, with the private and foreign banks holding 18.2 per cent and
6.5 per cent respectively.
3.5. PROFILE OF PRIVATE SECTOR BANKS
3.5.1. AXIS BANK
Axis Bank was the first of the new private banks to have begun
Operations in 1994, after the Government of
India allowed New private banks to be
established. The Bank was promoted jointly by the Administrator of the specified
undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of
India (LIC) and General Insurance Corporation of India (GIC) and other four PSU
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insurance companies, i.e. National Insurance Company Ltd., The New India
Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd. The Bank today is capitalized to the extent of
Rs. 357.71 crore with the public holding at 57.49 per cent. The Bank's Registered
Office is at Ahmadabad and its Central Office is located at Mumbai. Presently, the
Bank has a very wide network of more than 827 branch offices and extension
Counters. The Bank has a network of over 3595 ATMs providing 24 hrs a day
banking convenience to its customers. This is one of the largest ATM networks in
the country. The Bank has strengths in both retail and corporate banking and is
committed to adopting the best industry practices internationally in order to
achieve excellence.
3.5.2. ICICI BANK
ICICI Bank is India’s second-largest bank. The Bank has a network of
about 1443 branches and extension counters and
over 4721 ATMs. ICICI Bank was originally
promoted in 1994 by ICICI Limited, an Indian Financial institution, and was its
wholly-owned subsidiary. ICICI was formed in 1955 at the initiative of the World
Bank, the Government of India and representatives of Indian industry.
The objective was to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses.
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In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services group offering
a wide variety of products and services, both directly and through a number of
subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian
company and the first bank or financial institution from non-Japan Asia to be listed on
the NYSE. In 2001, ICICI bank acquired Bank of Madura Limited. ICICI Bank set up
its international banking group in fiscal 2002 to cater to the cross border needs of clients
and leverage on its domestic banking strengths to offer products internationally.
ICICI Bank currently has subsidiaries in the United Kingdom, Canada and
Russia, branches in Singapore and Bahrain and representative offices in the United
States, China, United Arab Emirates, Bangladesh and South Africa. Today, ICICI
Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its
specialized subsidiaries and affiliates in the areas of investment banking, life and
non-life insurance, venture capital and asset management.
3.5.3 HOUSING DEVELOPMENT AND FINANCE CORPORATION (HDFC)
Housing Development Finance Corporation Limited or HDFC, founded 1977
by Ravi Maurya and Hasmukhbhai Parekh, is an
Indian NBFC, focusing on home mortgages.
HDFC's distribution network spans 243 outlets that include 49 offices of HDFC's
distribution company, HDFC Sales Private Limited. In addition, HDFC covers over
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90 locations through its outreach programmes. HDFC's marketing efforts continue to
be concentrated on developing a stronger distribution network. Home loans are also
shacked through HDFC Sales, HDFC Bank Limited and other third party Direct
Selling Agents (DSA).HDFC Bank marked the beginning of its services in the year
1995 with setting a loud and clear message that it wants to become a "World-class
Indian Bank". It always believed in winning the hearts of its customers with quality
products and services. It is the sole reason why today HDFC has been able to achieve
both national and international acclaim. HDFC Bank India offers its customers a large
number of products and services to meet their diverse needs and requirements.
The vast range of products and services of the bank is composed of
 Payment Services-NetSafe, InstaPay, BillPay, DirectPay, Online Donation,
Visa Money Transfer
 Remittances -Funds Transfer Cheques / DDs / TCs, Quick remit, Cheque
Lock Box, Quick remit
• Funded Services, Non-Funded Services, Specialized Services, Value Added
Services, Internet Banking
3.5.4. KARUR VYSYA BANK
The Karur Vysya Bank popularly known as KVB was set up in 1916 by the
Late Shri M.A. Venkatarama Chettiar and the
Late Shri. Athi Krishna Chettiar to inculcate
savings habit and to provide financial assistance to traders and small agriculturists
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in and around Karur, a textile town in TN. Karur Vysya Bank has a network of
234 branches and 5 extension counters spread over 11 States and 2 Union
Territories. Karur Vysya Bank is one of the early banks to adhere to the norm of
Capital Adequacy Ratio stipulated by RBI right from its introduction. The Bank
has been maintaining a healthy Capital Adequacy Ratio of over 16 per cent as against
the mandatory norm of 9 per cent prescribed by the RBI, The Karur Vysya Bank is
professionally managed by a by the Board of Directors, who are visionaries from
different fields. The aim of the bank is to please their customers continually with
providing a perfect blend of tradition and technology along with innovative
facilities and best service at affordable rates. With a very effective management
and efficient work force, within its 93 years of existence the bank has spread to
numerous parts of the country. Started with a regional flavor, the bank has spread
throughout the length and breadth of the country with over 285 branches.
The Karur Vysya Bank recorded a 33.77 per cent growth in total business
during fiscal 2007-08. The total business of the bank at the end of financial year
2007-2008 was Rs. 22118.83. Karur Vysya Bank provides customers with numerous
facilities right from personal banking to corporate banking, insurance and foreign
outward remittance. As a part of personal banking facilities, savings account,
personalized loans, debit cards, deposits, life insurance, general insurance, mobile top
ups, farmer's green card, freedom saving accounts, students saving account can be
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availed. The bank also offers its customers other facilities like Locker facility and
VISA Debit Card. The Karur Vyasya Bank provides with 24x7 retail as well as
Internet Banking Solutions.
3.5.5. SOUTH INDIAN BANK
South Indian Bank was established by a band of enterprising men at a time
when Swadeshi movement was gathering momentum. The Bank was established in
Thrissur a major town in the erstwhile State of
Cochin. The objective behind establishment of the
Bank was to provide for the people a safe, efficient
and service oriented repository and service oriented repository of savings of the
community on one hand and to free the business community from the clutches of
greedy moneylenders on the other by providing need based credit at reasonable
rates of interest. ICICI Bank Ltd is the biggest shareholder of the South Indian
Bank holding 11.25 per cent of the bank's equity. Presently, South Indian Bank has
a network of 450 branches and 45 Extension Counters spread over 19 States/UT.
South Indian Bank has several firsts to its credit. The private sector banks in
Kerala to become a scheduled bank in 1946 under the RBI Act. FIRST private
sector bank in India to open a Currency Chest on behalf of the RBI in April 1992
,first to open a NRI branch in November 1992,first among the Kerala based banks
to offer a Credit Card to customers in November 1992,first private sector bank to
start an Industrial Finance Branch in March 1993,first among the private sector
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banks in Kerala to open an "Overseas Branch" to cater exclusively to the export
and import business in June 1993.First bank in Kerala to develop in-house, fully
integrated branch automation software in addition to the in-house partial
automation solution operational since 1992.
3.5.6. LAKSHMI VILAS BANK
The Lakshmi Vilas Bank (LVB) was founded eight decades ago
(in 1926) by seven people of Karur under the
leadership of Shri V.S.N. Ramalinga Chettiar, mainly
to cater to the financial needs of varied customer segments. The bank was
incorporated on November 03, 1926 under the Indian Companies Act, 1913 and
obtained the certificate to commence business on November 10, 1926, The Bank
obtained its license from RBI in June 1958 and in August 1958 it became a
Scheduled Commercial Bank. During 1961-65 LVB took over nine Banks and
raised its branch network considerably. To meet the emerging challenges in the
competitive business world, the bank started expanding its boundaries beyond
Tamil Nadu from 1974 by opening branches in the neighboring states of Andhra
Pradesh, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Gujarat, West Bengal,
Uttar Pradesh, Delhi and Pondicherry. Mechanization was introduced in the Head
office of the Bank as early as 1977. At present, with a network of 246 branches,
5 satellite branches and 5 extension counters, spread over 14 states and the union
territory of Pondicherry, the Bank's focus is on customer delight, by maintaining
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high standards of customer service and amidst all these new challenges, the bank
is progressing admirably. LVB has a strong and wide base in the state of Tamil
Nadu, one of the progressive states in the country, which is politically stable and
has a vibrant industrial environment. LVB has been focusing on retail banking,
corporate banking and banc assurance. The Bank's business crossed Rs. 9,477 Crores
as on March 31, 2008. The Bank earned a Net profit of Rs. 25.27 Crores.
3.5.7. CATHOLIC SYRIAN BANK
The Catholic Syrian Bank was founded on November 26, 1920 in Thrissur
city and commenced business on January 1, 1921 with an authorised capital of
Rs 5 lakhs and a paid up capital of Rs 4,5270.
In August 1969, the bank was included in the
Second Schedule to the Reserve Bank of India Act 1934. In 1975, the bank attained
the status of "A" Class Scheduled Bank when its total deposits crossed Rs 25 crores.
Catholic Syrian Bank has 363 branches, 1 extension counter and over 125 ATMs, and
a net profit of Rs 36.56 crore in 2007-08 on revenues of Rs 50 crore. Catholic Syrian
Bank has a strong presence in rural India and around 80 per cent of the bank’s
branches are located in the semi-urban and rural areas of India. Aluva-based Federal
Bank in 2008 has proposed the merger with CSB. The other largest shareholder in
CSB is Thailand-based NRI, Surachan Chawla with a 21 per cent stake. Catholic
Syrian Bank has chosen Sun Microsystems to implement its core banking solution
(CBS) that will help customers access the bank’s services through the branches,
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Website and ATMs. CSB will Rs 40 crore on the solution, which includes hardware,
software, application and network. The centralised banking solution (called Maarvel)
was developed jointly with Laser Soft, a Chennai-based company.
3.5.8 KARANATAKA BANK
Karnataka Bank is a private sector banking institution based in the town of
Mangalore in Karnataka, India. The Reserve Bank of India has designated Karnataka
Bank as an A- class scheduled commercial
bank. The bank now has a national presence
with a network of some 463 branches across 19 states and 2 Union Territories.
It has over 4,800 employees and 3.5 million customers, including farmers and
artisans in villages and small towns throughout the country. Its shares are entirely
privately-owned by some 68,942 shareholders. For the quarter that ended on
December 12, 2008, the total interest earned was Rs. 508.4 crores. The total
income for the bank was Rs. 607.17 crores and the expenditure, Rs. 468.86 crores,
thereby yielding a profit of Rs. 138.31 crores. Karnataka bank has expanded its
reach to various parts of India, over the 85 years of its existence. Today, the bank
has a total of 447 branches, spread across 19 states and 2 Union Territories, with a
total business of about Rs. 31248 Crore. Karnataka Bank provides a broad range
of customized products and services suitable for all kinds of market, trade and
perceived requirements, be it business or personal. It deals in personalized
banking, business banking, money transfer, internet banking and insurance
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services. The facilities include borrowing facilities, deposits, optimum returns on
surplus funds and helping with smooth overseas transactions. As a part of
personalized banking, Karnataka Bank provides services for high earning deposits,
simple & convenient loans, life insurance, money transfer, utility bill payments
and thus, efficiently keeps a track of your finances. As a part of its business
banking, the bank provides with working capital finance, term loans and
infrastructure finance, to expand business smoothly. The Internet Banking facility
of Karnataka Bank, Money Click TM lets to manage finances as per customer’s
own convenience, anytime and anywhere. It is a 24X7, completely free and
friendly internet banking solution to all problems. The Karnataka Bank has been
striving to keep pace with advances in banking technology by adopting Core banking
and Internet banking, and establishing its Money Plant Automated Teller Machine
system. The bank also runs a 24-hour internet banking service called Money click.
3.5.9. FEDERAL BANK
Federal Bank is a major Indian commercial bank in the private sector,
headquartered at Aluva, Kochi, Kerala. As of 2008 it had
674 branches and 681 ATMs around the country. An its
attempt to serve customers with the best and to provide
them an easy means of banking, Federal Bank in India has
come up with many first of its kind services and products that re-defined the entire
banking scenario of India. These are Launched
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 Internet Banking Service via Fed Net among all the traditional banks in India ,
 Made its branches automated, Inter-connected all its branches Started
Electronic Telephone Bill Payment
 Introduced e-shopping payment gateway
 Offered Mobile Alerts and Mobile Banking service
 Devised a way for Express Remittance Facility from Abroad
 Provided RTGS facility in all its branches
3.5.10. ING VYSYA BANK LTD.
ING Vysya Bank Ltd. is a joint venture between Vysya Bank Ltd, a
premier bank in the Indian Private Sector and ING, a global financial powerhouse
of Dutch origin. ING Vysya Bank was founded in
October 2002. Vysya Bank was founded in 1930 to
extend a helping hand to those who were deprived of banking services. Since then
the Bank has made rapid strides and has carved a distinct identity of being India's
Premier Private Sector Bank. In 1985, the Bank became the number one private
sector bank in India. ING group originated in 1990 from the merger between
Nationale - Nederlanden NV the largest Dutch Insurance Company and NMB Post
Bank Groep NV. The newly formed company called "International Nederlanden
Group" came to be known as ING. The Bank has presence in 57 countries and has
employee strength of over 125000 people.
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3.6. DETERMINANTS OF USAGE BEHAVIOUR
3.6.1. CONSUMER BEHAVIOUR
Consumer behaviour is very complex phenomenon, which is considered
primarily in marketing decisions. In consumer behavior it is very difficult to make
a uniform theory that may suggest that a particular individual or group will behave
in a particular manner. Consumer behavior is dynamic and to be studied regularly.
Increasing awareness, living standards and urbanization has led to increase in the
changing preferences and the same has forced the marketers to change their
product features, packaging styles, distribution channels. Identical products always
have their life cycle the product life cycle suggests that there is a level of maturity
of the product and after that no more consumers can be attracted for that. It is
same with preferences of consumers that they always like some innovative and
different products to use.
The study of consumer behavior is compulsory to know about likes and
dislikes of consumers from time to time so that the products and services can be
offered accordingly. Customers have their own unique needs, demands and
preferences in a particular segment. Marketers have to study customers in particular
segment. The study of consumer behavior can make it possible that after observing
and examining the behavior of consumer a marketer can present his product in such a
way that the product can capture the market. Consumer behavior indeed gives every
possible answer to the complex questions concerned with consumer's buying reasons.
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3.6.2. SERVICES
Service is an activity or benefit that one party offers to another. It is about
people thinking about taking care of people. It is an ongoing process of
commitment in action and selling of satisfaction. It is a feeling, which a person
gets while dealing with an organisation. It is experiencing the experience. Services
are people based, therefore they are highly variable and inseparable from the
source i.e., employees. Service is essentially intangible and does not result in the
ownership of anything. In economics and marketing, a service is the nonmaterial
equivalent of goods.
3.6.3. USERS OF BANKING SERVICES
The prospects of potential buyers of services constitute an important place,
particularly in the bank marketing. The line of services or product planning and
development, service offerings, the pricing strategies, or the interest or costs
charged for the services made available and the promotional measures depend on
the changing psychology of the actual users and potential users.
Users of Banking Services
Prospects or
Industrial users General Users
actual user
General users - All the persons having an account in the bank and utilizing the
banking facilities at the terms and conditions fixed by the bank are termed as
general users
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Industrial users - Industrialists or entrepreneurs having an account in the bank
and utilising the credit facilities for the establishment or expansion of their
business are known as Industrial users
Potential users or prospects - General or industrial prospects at present not
utilizing the services of a bank but are expected to be motivated or induced are
termed to be potential users.
BEHAVIOUR OF USERS
The formulation of marketing mix is directly or indirectly related with
changing behavior of users. A gradual change on the users behavior is a natural
phenomenon as multifaceted developments in socio economic condition affect
their mental condition .It is essential that a marketer is aware of all these
developments so as to make the marketing decisions productive or effective
3.6.4. SERVICE CUES OR ATTRIBUTES
Consumers organize information at various levels of abstraction ranging
from simple product attributes to complex personal values. Attributes that signal
quality have been dichotomized into intrinsic and extrinsic cues. Intrinsic cues are
attributes that are part of the physical composition of the product, for example
flavor, color, freshness, size, fit, and style. They cannot be changed without
changing the nature of the product and are consumed along with the product.
Extrinsic cues are attributes that related to the product, but they are not product-
specific and can serve as general indicators of quality across all types of products.
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Examples of extrinsic attributes include price, brand name, and level of advertising.
Previous research studies suggested that intrinsic attributes can be more important
to consumers than extrinsic attributes in the following situation:
 during consumption of the product;
 in pre-purchase situations when consumers are actively search for intrinsic
attributes;
 when the intrinsic attributes have high predictive value to judge quality.
Conversely, extrinsic attributes can be more important than intrinsic
attributes when, Consumer is in initial purchase situation, in which intrinsic
attributes are not available (i.e. for services); consumer has insufficient time or
interest to evaluate the intrinsic attributes; quality is difficult to evaluate. Because
services are intangible, consumers are more likely to use extrinsic cues to infer
service quality prior to the actual purchase and consumption of the service. Cues
such as price, brand, advertising, word-of-mouth and certain tangible service
elements are important to consumers as they attempt to judge the quality of a
service prior to consumption.
The abstract attributes included reliability, responsiveness, assurance,
empathy, and tangibles. In a period during the service delivery process, the
customer is directly interacting with the personnel, physical facilities and other
elements such as communication materials. Because services are intangible,
consumers use tangible clues as proxies in evaluating the quality of services.
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 Tangibles
If consumer perceives that the appearance of physical facilities, equipment,
personnel, and communication materials are good, then his or her judgment will be
positively affected, it is refereed as tangibles it include appearance of physical
facilities, equipment, personnel, and communication materials
 Reliability
The attribute termed reliability is associated to the ability of the service
provider to perform the promised services dependably and accurately. Reliability
is closely related to the concept of technical quality of service. It include ability to
perform the promised service dependably and accurately
 Responsiveness
The responsiveness attribute of service quality refers to whether the service
provider has the willingness to help customers and provide prompt service.
When the service provider provides prompt service to its customers, the Customer
perceives that he or she is receiving good quality. Customers frequently find
difficult to evaluate the quality of the service if they have not experienced yet the
particular service. Responsiveness include willingness to help customers and
provide prompt service
 Assurance
It is believed that the level of the customer's trust plays important role in
assessing the quality of the service provided by the service provider. The more the
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customer trusts the service provider, the better the customer's perception on the
service quality. The attribute termed assurance is associated with the ability of the
service provider to convey trust and confidence to the customer’s. Assurance
include Knowledge and courtesy of employees and their ability to convey trust and
confidence
 Empathy
If customers perceive that they are not receiving concerned, personal, or
individual attention from the service provider, then their quality judgment will be
negatively affected. This is called empathy it includes Caring, individualized
attention the firm provides its customers.
In the last ten years, the nature of customer relationships in retail banking
has been changing, especially since the advent of automatic teller machines and
internet banking. Within the last two decades, quality of service has become a
main interest in the industrial world especially in the service industries. The key to
success in winning the global competition now and in the future is to have high
quality service. High quality of service is believed to influence over customer
value and customer satisfaction, and furthermore customer satisfaction will affect
customer loyalty directly. Therefore, the importance of service quality, value, and
customer satisfaction seems justified to the survival of service companies,
including the banking companies.
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3.6.5. MARKETING MIX FOR BANKING SERVICES
The formulation of marketing mix for the banking services is the prime
responsibility of the bank. The innovative efforts become essential to make the
services internationally competitive
 PRODUCT
The products offered by a bank may be in the core or augmented form. The basic
or core products are the basic service offerings provided by almost all the banks. For
instance, a bank may provide savings bank accounts or housing loans to its customers.
The augmented product includes all the specific features and benefits that help the
marketers differentiate their offerings from those of competitors. They include the
supplementary services provided by the bank to the customers. A product mix refers to
all the products offered for customers by a particular seller. The product mix of a large
bank may include a large number of services, providing the customers all the financial
services under one roof. New and innovative products are being offered to customers to
meet their varying needs. To meet customer expectation and satisfy their needs, these
basic products need to be augmented with supplementary services. Some of these
services are Net, phone, mobile, ATM, mobile ATM banking, home banking, 24-hour
customer care service, anytime and anywhere banking where the customer is allowed to
conduct transactions in any of the bank’s branches, Add-on debit and credit cards.
Whenever a new service is offered in the market, the consumer perceives the quality of
the product by linking the service with the service provider.
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 PRICING
Pricing of any product or service affects its profitability because the price paid
by the customers determines the demand for the offering and also the revenues and
margins generated by it, The annual charges for credit and debit cards, penalties,
commissions for cross selling and charges for payment of utility bills are some of the
sources. Though pricing strategies like cost-based, competition based and customer-
based pricing are available, many banks base their pricing strategy on risk/return pay-
offs. However, while initiating a price change, reactions from customers as well as
competitors, have to be taken into consideration. Banks have to revisit their pricing
strategy to make the best of the changing times.
 PLACE
The specific characteristics of services could pose a whole lot of problems for
bankers. Earlier customers had to wait in queues for long hours to encash a cheque or
make a deposit. On the other side, the bank employees would get tired answering
customer queries and dealing with them. Electronic channels of distribution have
become quite strong with technological innovations. Mobile banking, ATMs, net
banking and 24 hour customer service have enabled the marketers to offer customers
financial and non-financial transactions with greater efficiency and at lower cost.
Customers are not crippled by factors like rush time and they enjoy greater flexibility
and convenience in availing of banking services. These technological innovations
have also reduced the element of heterogeneity in services, as more and more services
have been mechanized.
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Place refers to making the services accessible and available to customers.
The different channels for banking including both conventional and modern
distribution channels are Physical channels of distribution or bank branches,
Telephones and call centers, ATMs and ALMs (automatic lending machines)
Internet banking and home banking, Plastic Cards (Virtual, smart and mini credit
and debit cards) Virtual branches and automated video banking (Where ATMs,
phones can all be seen though not the staff) Mobile offices and mobile ATMs
 PROMOTION
The banking industry has been experiencing intense completion since the
opening up of the economy and the entry of foreign banks into the Indian market.
Indian banks have responded positively by upgrading their services and promoting
themselves aggressively in the market. Banks use different promotional strategies
like personal selling, advertising, discounts, meals etc., Banks also advertise their
services through different media like the print and electronic media. They put up
large hoardings where it will be noticed by employees and businessmen, Private
sector Banks also target specific segments through their advertising.
 PEOPLE
People have always been important for any services marketing. Though the
role of people seems to have diminished in banking services because of the
technology, their contribution cannot be ignored in practice .Services can offer
tailor-made to match the customer’s expectations. When a new service is
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introduced in the market, the banker can identify the target customer from among
his existing customer base and communicate it with less expenditure and effort
within a shorter time, as he knows their preferences by virtue of his association
with them.
 PROCESS
Process plays a significant role in winning customers and increasing market
share. It is the processes in a bank that determine the efficiency of its operations
and the quality of service delivery to customers. Every bank has a set of
predetermined processes for each of its transactions. For instance, the time
required by a customer to take a demand draft has come down from hours to
minutes. Increased competition has forced banks to improve their work-processes
and thus their efficiency. The various processes in a bank have been simplified,
made more customer-friendly and faster. Information technology too has helped
bankers in the process.
 PHYSICAL EVIDENCE
Along with people and process, physical evidence is also very important for
banks to make their service offering tangible. The following provide their physical
evidence to the customers of a bank Ambience, buildings and lawns, Air-conditioned
branch offices and ATMs, Furnished lounge for customers in queue, Amenities
like newspapers, drinking water etc., for customers.
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3.6.6. CUSTOMER SERVICES
Customer service is the set of behaviors that a business undertakes during
its interaction with its customers. It is the degree of assistance and courtesy
granted to those who patronize the organization. It is anticipation and identification
of customers' needs and expectations and taking action for positive customer
satisfaction. It consist codes of ethics, etiquette, behavior courtesy and so on.
In these days of fierce competition, in order to survive, commercial banks
have to seek business by aggressively marketing their products. Product
differentiation is often employed as a major technique to service in competitive
market. Since product differentiation on the interest front and service charges is
ruled out for Indian banks, it appears that banks have to bank their hopes on the
improvement of customer services. Therefore, in order to mobilise there deposits
and attract customers to use the services of a particular bank, a particular bank has
to necessarily differentiate its customer services from other banks and to offer
better customer services to survive in the competitive market.
Customer services in banks mean satisfying the needs of customers, at the right
time, and in a right manner. It is necessary that bankers tailor their services to the needs
of customers and not vice versa. A large portion of customer’s complaints arises
because of the disparity between customer expectations and bank services.
Products offered by banks have been changing over years, particularly in
recent years. These products are getting refined and revised in the light of
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customer needs, but not promptly enough or adequately and hence dissatisfaction
arises. Very often, there are abnormal delays in receiving/making payments and
customers have to wait indefinitely without anybody attending to them properly at
the counter. This leads to mounting frustration among customers. The procedures
laid down at the banks are lengthy and cumbersome. Even the issue of cheque
book takes twenty to thirty minutes because the officer is always busy with
cheques/vouchers and registers. Updating of pass book also takes a long time.
The Working Group on Customer Service is Banks set up by Government
under the Chairmanship of Mr. R.K. Talwar in 1975, has listed the following
factors for customer dissatisfaction:
 Delay and inaccuracy in putting through transactions;
 Delay and inadequacies in correspondence;
 Delayed, faulty and unhelpful decision-making
 Absence of elementary discipline;
 Undue emphasis of staff on observance of rules and produces
 Inconvenience associated with credit apprehension; lack of uniformity in bank
charges
 Customers being viewed as a faceless unit
 General attitude of unconcern and apathy for clients.
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Delivery system for customer services comprise five elements; speeds,
timeliness, accuracy, courtesy and concern. The present Customer Service System
lacks motivation and initiative, thus adversely affects the services offered. Neither
the branch manager nor his staffs take initiative in advising customers on the
choice of deposit plan, mode of operating an account, choice of credit facility or
how to draw the best possible benefit from the banking schemes and services.
3.6.7. CUSTOMER SATISFACTION
Customer satisfaction is a relative judgment that takes into consideration
both the qualities and benefits obtained through a purchase as well as the costs and
efforts borne by a customer to obtain that purchase” customers satisfaction is a
cognitive state wherein feels that rewards are commensurate to the sacrifices.
There is two types of satisfaction : service encounter satisfaction and
overall satisfaction .Service encounter satisfaction is a transaction-specific
evaluation while overall satisfaction is a more comprehensive evaluation of the
firm and all the service and overall satisfaction are the result of either confirmation
of expectation or positive.
3.6.8. DETERMINANTS OF CUSTOMER SATISFACTION
Customer satisfaction is influenced by a number of variables. These
variables are expectations, performance, disconfirmation and the desires.
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a) Expectations
Expectations have been defined in the literature as predictions about what
may likely occur in an exchange. These predictions are used as the basis for
comparing performance.
b) Performance
Performance may be defined as the commission or omission of the service
or some aspect of it. The role of performance is that it is the point of comparison
by which disconfirmation may be assessed .Performance that meets or exceeds
expectations leads to satisfaction.
c) Disconfirmation
Disconfirmation stems from the difference between prior expectations and
actual performance. Disconfirmation is an independent construct that has additive
effects on satisfaction .It advocated to, measure disconfirmation independently of
expectations and performance. However because disconfirmation has been defined
as a difference, researchers are unable to manipulate and measure it independently.
d) Desires
Desires can be defined as abstractly in terms of the most basic and
fundamental needs, life goals not desired end states or more concretely in terms of
the means that a person believed will lead to the attainment of the desires end
states.
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3.6.9. MEASURING CUSTOMER SATISFACTION
Satisfaction has been measured in terms of complaint behavior. The use of
complaint behavior to measure satisfaction is not common. The most frequently
used approach is the disconfirmation approach.
The disconfirmation approach to measuring satisfaction holds that the
satisfaction is related to the size direction of the disconfirmation experience.
This disconfirmation is a result disconfirmation of experience is a result of
discrepancy between a person’s initial expectation and his assessment of the
performance.
3.7. SUPPLEMENTARY SERVICES OF BANKS
Supplementary service are the service which are provided in addition to
core product offerings to the customers by the private sector banks. Some
commonly used service are given below:
3.7.1 AUTOMATED TELLER MACHINES (ATMs)
ATM is an electronic machine, which is operated by the customer himself
to make deposits, withdrawals and other financial transactions. ATM is a step in
improvement in customer Value-added service. ATM facility is available to the
customer 24 hours a day. The most advantageous, features of ATMs are the
twenty-four hour availability, time saving/convenience aspects, avoidance of
queues and the perception that bank staffs have more time to deal with counter
customers. The concept of consumer financial services delivery has changed.
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Besides quick and better service, the customer now demands the facility to
withdraw the money all the twenty four hours. The trends of automatic consumer
self-service terminals and the heightened public away of automated transactions
have initiated a new era in banking. As a result, Automated Teller Machines
(ATMs) are set to play an important role in banking. ATM is a terminal of the
bank's computer which can be operated by customer himself to deposit, withdraw
cash and to know the balance in the account. The ATM offers many benefits to the
customer as well as the bankers. Benefits to customers include easy access to cash
- day and night, weekends or holidays, fast service, convenience of location etc.,
benefits to banks include - improved customer service, larger penetration,
alternative to extended hours service, less crowding at the bank counters.
3.7.2. ELECTRONIC FUNDS TRANSFER-POINT OF SALES TERMINALS
Electronic funds Transfer - Point of Sales Terminals can be installed at
Airlines, Hotels, Railways, Super Bazaars and other commercial centers.
Customer will get rid of the botheration of carrying cash, as the payments made
through cards backed by the security features of Personal Identification Numbers
(PIN) or password etc., at selected installations where POS terminals are installed.
Point Sales Terminals can be linked to the bank's host computer.
3.7.3 CREDIT CARDS/DEBIT CARDS
The business demands high level of automation even in initial stages.
Computerisation of operations is a must, as one of the main determinants
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of success in this business is need of processing transactions and billing
customers in time. A debit card differs from the conventional credit card in the
sense that the cardholder's account gets instantaneously debited unlike in case of
credit cards where the cardholders is given a credit for a fixed period. Consumer
studies have shown that spending is much higher with debit cards than with credit
cards.
3.7.4. INTERNET BANKING
Internet banking enables a customer to do banking of accessing accounts
and general information on bank products and services through a computer while
sitting in his office or home. This is also called virtual banking. It is more or less
bringing the bank to your computer. In traditional banking one has to approach the
branch in person, to withdraw cash or deposit a cheque or request a statement of
accounts etc. but internet banking has changed the way of banking. Internet
banking refers to use of internet as a delivery channel for the banking services
including traditional services like opening an account, electronic bill payment and
presentation which allows the customers to pay and receive the bills on a bank’s
website.
3.7.5. PHONE BANKING
Phone Banking is another innovation which provided the facility of
24 hour services that is fast, convenient and secured for all customers. It is based
on the voice processing facility available on bank computers. It refers to dialing
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one phone number using a telephone to access the account, transfer funds, request
statements, cheque books simply by following the recorded message and touching
the keys on the phone It results in improved customer satisfaction within available
infrastructure facilities. NRIs can also make queries and issue instructions at
convenient time in their respective countries .Facilities Offered by phone banking
are information on balance, getting the statement of account on any fax machine of
his choice directly from bank's Computer which may also feature the last three
transactions of his accounts, cheque book requisition, money transfer branch to
branch, request for drafts, stop-payment instructions, queries on new schemes, rates,
general details of interest rates, information on customers deposit maturities etc.,
3.7.6. MOBILE BANKING
Taking advantages of the booming market for mobile phones and cellular
services, several banks have introduced mobile banking which allows customers to
perform banking transactions using their mobile phones. Banks introduced SMS
services. Mobile banking has been especially targeted at people who travel
frequently and to keep track of their banking transaction. The mobile owing
customers of banks can give their approval for the clearance of the cheque with the
two way communication technology development. The two way text messaging
system allows customers to submit requests and get answers form the bank on the
mobile phones about banking transactions like clearance cheques and credit balance.
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3.7.7. MARKETING STRATEGIES OF BANKS
 Constant product innovation to match the requirements of the customer
segments -The customer database available with the banks is the best source of
their demographic and financial information and can be used by the banks for
targeting certain customer segments for new or modified product. The banks
come out with new products in the area of securities, mutual funds and
insurance.
 Quality service and quickness in delivery-As banks are offering retail
products of similar nature; the customers can easily switchover to the one,
which offers better service at comparatively lower costs. The quality of service
that banks offer and the experience that clients have, matter the most. To retain
the customers, private sector banks come out with competitive products
satisfying the desires of the customers at the click of a button.
 Introduction of new delivery channels-Retail customers like to interface with
their bank through multiple channels. The private sector banks give high
quality service across all service channels like branches, Internet, ATMs, etc.
 Tapping of unexploited potential and increasing the volume of business -
The Indian retail banking market still remains largely untapped giving a scope
for growth to the banks and financial institutions. With changing psyche of
Indian consumers, who are now comfortable with the idea of availing loans for
their personal needs, banks have tremendous potential lying in this segment.
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 Infrastructure outsourcing-It helps in lowering the cost of service channels
combined with quality and quickness
 Detail market research-Banks go for detail market research, which will help
them in knowing what their competitors are offering to their clients. This will
enable them to have an edge over their competitors and increase their share in
retail banking pie by offering better products and services
 Cross-selling of products-Private sector banks have an added advantage of
having a network of branches, selling third-party products through branches.
 Business process outsourcing-Outsourcing of requirements would not only
save cost and time but would help the banks in concentrating on the core
business area. Private sector Banks devote more time for marketing, customer
service and brand building.
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09 - Chapter 3

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CHAPTER III

OVERVIEW OF BANKS AND CUSTOMER USAGE BEHAVIOUR

extensive reach. It is no longer confined to metropolitans or cosmopolitans in fact.

This is the main reason for India’s growth process

3.2. BANKING IN INDIA

Banking in India originated in the first decade of 18th century with

being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of

Allahabad Bank, which was established in 1865.

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given broader powers

3.3. EARLY HISTORY

including speculative trades in cotton. With large exposure to speculative ventures,

Subsequently, banking in India remained the exclusive domain of Europeans for

which later became the State Bank of India.

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banks, mostly owned by the Europeans, concentrated on financing of foreign

ship, divided by solid wooden bulkheads into separate and cumbersome

compartments." Under these circumstances, many Indians came forward to set up

Baroda, and Canara Bank

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At least 94 banks in India failed during the years 1913 to 1918.

3.4. STRUCTURE AND EVOLUTION OF THE INDIAN BANKING SECTOR

development of banking in India into different phases by describing the

characteristic features of each stage. It describes briefly the chequered history of

banking in India—dominated by bank failures and mergers and the disappearance

of small private banks—and also examines other developmental aspects. It also

industrial growth and consequently its impact on banking instability.

from the history of banking deregulation.

3.4.1. DEVELOPMENT OF BANKING IN INDIA: DISTINCT PHASES

out of deregulation. Four broad phases have been described:

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• Pre-independence period: 1906–46

• Post-independence regulated period: 1947–93

• Post-independence deregulated period from 1993 onwards.

3.4.1.1. EARLY HISTORICAL AND FORMATIVE PERIOD: 1770–1905

characterized by any kind of banking regulation. The development of banking in

indigenous bankers’ language as well as the indigenous bankers’ inexperience of

conduct their banking business based on unlimited liability. A new type of

acquired control over the management of a company.

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liquidated because of its inability to earn profits following the currency

restrictions on Europeans settled in India. English agency houses established a

number of banks, which conducted ordinary banking business, financed internal

trade, and issued notes.

destroyed. The currency confusion in the period 1873–93 led to trade

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Consequently, the post-Swadeshi movement boom ended in a banking crisis

A number of banks were established to finance industries. But from 1922

onwards, the number of bank failures increased because of economic depression.

working capital was reflected in excessive interest rates because of high-risk

To meet this demand, a number of banks came up in western India, Punjab,

most elementary principles of banking. Keynes has attributed the vulnerability of

Indian banks to undercapitalization, inadequate cash reserves, and speculative

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led to the luring of depositors while paying higher rates of interest.

The banks employed the funds provided by depositors in hazardous

followed a cautious lending policy and lent only to established houses.

speculative dealings in silver, pearls, and other commodities. Long-term businesses

some long-term capital to new investors in the form of indefinite extensions of

short-term loans. A disproportionate share of the total available funds was

deceive the public. Many managers resorted to absolute dishonesty, fraud, or

criminal mismanagement, and continued operating in collusion with the auditors.

banks by showing debt on their books. To hide evidence of mismanagement and