Customer loyalty in indian banking sector a comparative study

International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –
6510(Online), Volume 4, Issue 2, March- April (2013)
236
CUSTOMER LOYALTY IN INDIAN BANKING SECTOR: A
COMPARATIVE STUDY
Dr. Sandip Ghosh Hazra1
, Prashant Piyush2
and Tapan Kumar3
1
Head, Department of Humanities & Management, Birla Institute of Technology, Mesra-
Deoghar Campus
2
Student- B.E.-Final Year Birla Institute of Technology, Mesra
3
Student- B.E.-Final Year Birla Institute of Technology, Mesra
ABSTRACT
Prior to liberalisation, public sector banks functioned in a sheltered environment. The
arrival of foreign and private banks forced Indian public sector banks to meet the challenge of
competition. A competition between the public sector banks and private sector banks has
taken place fiercely. Customer loyalty serves as a significant source of competitive benefit in
banking sector. The objectives of the study are to examine the differences in customer loyalty
between private and public sector banks and to examine the effect of demographic
characteristics of customers. Purposive sampling method has used to collect data. Three
factors of customer loyalty have identified-loyalty to company, response to problems and
willingness to pay. The results reveal that there are significant differences in public and
private sector banks with regard to willingness to pay, and loyalty to company.
Keywords: Customer Loyalty, Banking Sector
INTRODUCTION
Customer loyalty is the repeat purchase, referring the company to other customers
(Day, 1969; Heskett, Jones, Loveman, Sasser & Schlesinger, 1994), generates positive and
measurable financial results (Duffy, 2003) and contributes to the profitability of the service
providers (Anderson & Mittal, 2000; Anderson & Sullivan, 1993).
The arrival of foreign and private banks forced Indian public sector banks to meet the
challenge of competition, to pay attention to their customers and retain their customer base.
Public sector banks are facing increasingly more competition, whereas foreign and private
INTERNATIONAL JOURNAL OF MANAGEMENT (IJM)
ISSN 0976-6502 (Print)
ISSN 0976-6510 (Online)
Volume 4, Issue 2, March- April (2013), pp. 236-243
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237
sector banks are trying to win customer loyalty by providing them better quality services. A
fierce competition between the public sector banks and private sector banks has taken place.
Researchers have suggested that customer relationship with service personnel is influential in
the development of customer loyalty to a service firm (Barnes, 1995; Beatty, Mayer,
Coleman, Reynolds & Lee, 1996; File & Prince, 1993; Gwinner, Gremler & Bitner, 1998).
Customer loyalty has a powerful impact on the performance of service firms and serves as an
important source of competitive advantage (Heskett, Sasser & Schlesinger, 1997; Rust,
Zeithaml & Lemon, 2000; Woodruff, 1997), and concerned with the likelihood of customer
returning, making business referrals, providing strong word-of-mouth references and
publicity (Bowen & Shoemaker, 1998). Loyal customers are less likely to switch to a
competitor due to a given price inducement, and these customers make more purchases
compared to less loyal customers (Baldinger & Rubinson, 1996). The major objectives of the
study are to identify the factors of customer loyalty, to examine the differences in customer
loyalty between private and public sector banks and to examine the effect of demographic
characteristics of customers between public and private sector banks.
Method
Sample
The data were collected from three hundred customers belonging to five nationalized
banks and three private sector banks in India. 160 (53 per cent) were from public sector
banks, and 140 (47 per cent) from private sector banks. The banks were mainly located in
West Bengal. The respondents had contacts with the banks on a regular basis over the last 3
years, visited the bank premises frequently for transactions and were savings bank account
holders. A total of 350 questionnaires were distributed. Total number of filled questionnaires
collected back from respondents was 320 representing the return rate of 91 per cent. The
response rate was considered satisfactory for self-report survey of this type (Miller, 1991;
Yammarino, Skinner & Childers, 1991). Out of these questionnaires, 20 had to be rejected
because of a high number of missing data or high response bias leaving an overall sample
size of 300. Purposive sampling method was used to collect data. Respondents belonged to
different education levels and occupations. A brief summary of sample characteristics is
given (Table 1).
Table 1. Summary of Sample Characteristics
Public sector banks Private sector banks
No. Percentage No. Percentage
Education
High School 17 10.62 02 1.43
Intermediate 15 9.37 13 9.29
Graduation 63 39.38 89 63.57
Master’s Degree 56 35 31 22.14
Others 09 5.63 05 3.57
Total 160 100 140 100
Occupation
Professionals 57 35.63 45 32.14
Sales related work 19 11.87 31 22.14
Services related work 48 30 42 30
Others 36 22.5 22 15.72
Total 160 100 140 100

238
Measures
The study was conducted in an exploratory framework using survey research. Customer
loyalty was measured using a 13-item scale adopted from the behavioural-intentions battery
(BIB) developed by Zeithaml, Berry and Parasuraman (1996), using the five-point Likert
Scale. It contained five items relating to loyalty to company, two items relating to propensity
to switch, two items relating to willingness to pay, three items on external response to
problems and one item regarding internal response to problems. Questions related to the
demographic characteristics of the respondents were also measured.
Results and discussion
The data were subjected to factor analysis to identify the factors and establish the
construct validity. The factor analysis was done using principal component with varimax
rotation, as they appeared to be interrelated with each other. The highest loading against any
factor was taken into account as a representative of that scale showing the construct validity.
The 13-item scale of customer loyalty was factor analyzed, which resulted in three distinct
factors, namely loyalty to company, response to problems, and willingness to pay. It had an
Eigen value of 3.83, 2.07, and 1.46 respectively and together accounted for 57 per cent of
variance. A summary of the factor analysis results along with their loadings is presented in
Table 2.
Table 2. Summary of Factor Analysis for Customer Loyalty
Factor1 Factor 2 Factor3
Loyalty to company Response to problems Willingness to pay
Item Loading Item Loading Item Loading
1 .69 10 .63 7 .55
2 .81 11 .82 8 .78
3 .75 12 .84 9 .81
4 .76 13 .33
5 .79
6 .63
Eigen Value 3.83 2.07 1.46
Percentage of Variance 30 16 11
Total variance explained= 57 per cent
In order to examine whether Factor Analysis is an appropriate analysis to identify
factor, the Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy and Bartlett's test of
sphericity was conducted. For the scale of customer loyalty, the Kaiser-Meyer-Olkin (KMO)
measure of sampling adequacy (KMO=0.80) value is acceptable if KMO value is greater than
0.70 (Kaiser & Rice, 1974). Bartlett's test result shows that the values are significant and thus
acceptable (Table 3).
Table 3. KMO and Bartlett's Test Results for Customer Loyalty
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .80
Bartlett's Test of Sphericity
Approx. Chi-Square 1156.95
df 78
Sig. .01

239
Thus, customer loyalty emerged as multidimensional in nature. Customer loyalty factors were
loyalty to company, response to problems, and willingness to pay. The reliability coefficient
for loyalty to company was .84. It was .65 for response to problems; and for willingness to
pay it was.63. A summary of tool characteristics for each of the scales is provided in Table 4.
Table 4. A Summary of Tool Characteristics
Factors No. of
Items
Mean SD Alpha
Coefficient
Loyalty to Company 6 22.36 4.57 .84
Response to Problems 4 15.16 3.08 .65
Willingness to Pay 3 8.40 2.75 .63
After examining the construct validity and identifying the factors, proposed hypotheses were
tested. The results related to different hypotheses are presented and discussed below.
H1. Customers’ perception would significantly differ between public and private sector banks
with regard to customer loyalty.
In order to examine the differences, t-test for independent samples was conducted. The
results were given in Table 5.
Table 5. Summary of Independent Samples T-Test examining differences in Loyalty to
Company, Response to Problems and Willingness to Pay in public sector banks and
private sector banks
The results showed that there were significant differences in public and private
sector banks with regard to willingness to pay, and loyalty to company. No significant
differences were found for response to problems. Customers would recommend their banks to
others, as employees were more responsive to their requests. They would not mind paying
extra charges due to the convenient operating hours of the bank. Customers from private
sector banks seem to be satisfied because of management’s willingness to help customers,
and their adequate knowledge about banking services. They would also defend when
someone would criticize their bank. Public sector banks have been losing customers to
private sector banks. They need to satisfy their customers by providing better quality services
at a higher speed for increased loyalty.
Banks N Mean Std.
Deviation
Std. Error
Mean
t-test Sig(2-
tailed)
Loyalty to
Company
Public Sector 160 21.76 5.14 .41 2.44 .02
Private Sector 140 23.04 3.71 .31
Response to
Problems
Public Sector 160 15.12 2.90 .23 .25 .80
Private Sector 140 15.21 3.28 .28
Willingness
to Pay
Public Sector 160 7.96 2.78 .22 3.01 .01
Private Sector 140 8.90 2.64 .22

240
H2. Perception of customers regarding customer satisfaction, customer loyalty, customer
commitment and customer trust would differ across education of customers.
In order to examine the differences in customer perception across education, ANOVA was
conducted. Customers were divided into five different educational categories starting from
high school to post-graduate studies and others. The results (Table 6) showed that there were
significant differences with regard to willingness to pay (F=5.13, p<. 01). However, no
significant differences were found with regard to loyalty to company (F=1.46, p>.05), and
response to problems (F=. 67, p>.05).
Table 6. Summary of Analysis of Variance (ANOVA) examining differences in Loyalty
to Company, Response to Problems and Willingness to Pay in education
** Significant at 0.01 level * Significant at 0.05 level.
The results reveal that highly educated customers were more satisfied with the
behaviour of the employees. Customers, who were better educated (graduates), were willing
to pay extra charges to the bank mainly due to the better quality of service. However,
customer perception did not significantly differ regarding loyalty and response to problems.
This shows that customers are not loyal to banks. They could switch their loyalty in case the
banks did not provide services as per their expectations. Irrespective of their level of
education, customers from both types of banks perceived them equally good or bad in solving
their problems.
H3. Perception of customers regarding customer loyalty would differ across occupations of
customers.
In order to examine the differences in the perception across differences in occupational
groups, ANOVA was conducted. The results of the analysis of variance (Table 7) showed
that there were significant differences in perception across different occupational groups with
regard to loyalty to company (F=2.51, p<.05). However, no significant differences were
found with regard to willingness to pay (F=1.26, p>.05) and response to problems (F=. 52,
p>.05).
Sum of
Squares
df Mean
Square
F
Loyalty to
Company
Between Groups 121.47 4 30.37 1.47
Within Groups 6109.65 295 20.71
Total 6231.12 299
Response to
Problems
Between Groups 25.85 4 6.46 .68
Within Groups 2806.47 295 9.51
Total 2832.32 299
Willingness
to Pay
Between Groups 146.88 4 36.72 5.13**
Total 2257.80 299

241
Table 7. Summary of Analysis of Variance (ANOVA) examining differences in Loyalty
to Company, Response to Problems and Willingness to Pay in occupation
** Significant at 0.01 level * Significant at 0.05 level.
The results indicate that customers, who are doing business, recommended the same
to others who asked for advice. Banks’ performance greatly depends on such customers, so
they try to provide them better services so that they remain loyal to them. So far as salaried
class, low-end customers are concerned, they do not seem to be loyal and have a tendency to
switch their loyalty to other banks.
Summary and Conclusion
Summary of Results
The data were subjected to factor analysis to establish the construct validity and
identify the factors for customer loyalty namely, loyalty to company, response to problems
and willingness to pay. The results reveal that there were significant differences in public and
private sector banks with regard to willingness to pay, and loyalty to company. Highly
educated customers were more satisfied and ready to pay extra charges to their bank, and
customers, who are doing business, recommended their bank to others who asked for advice.
CONCLUSION
Customers from private sector banks and customers, who are doing business,
seem to be more delighted compare to public sector. They would recommend their banks to
others, defend when someone criticize their bank and ready to pay extra charges. Highly
educated customers were more pleased with the behaviour of the employees and were willing
to pay extra charges to their bank.
Sum of
Squares
df Mean
Square
F
Loyalty to Company
Between Groups 154.96 3 51.65
2.52*
Within Groups 6076.16 296 20.53
Total 6231.12 299
Response to Problems
.53
Total 2832.32 299
Willingness to Pay
1.27
Total 2257.80 299

242
LIMITATIONS
The study was limited to saving bank account customers, who had contacts with the
banks on a regular basis over the last 3 years. The sample size was relatively small and drawn
from a specific state (West Bengal) of India, which makes the generalisation of the findings
difficult.
Suggestions for Future Research
Based on the limitations, certain suggestions are offered for further research. The
study can be extended to other types of firms such as investment banks, financial institutions,
insurance companies, travel agencies, higher education institutions, and healthcare providers.
Future research can also be taken up by using a larger and diversified random sample to
increase its generalisability. Future research should incorporate other types of service
providers, and more variables to combine them into an integrated model to get a better
understanding of the relationship among these variables in the Indian banking sector.
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