A REVIEW ON MEDIATING EFFECT OF SERVICE

QUALITY ON NON BANKING FINANCIAL

INSTITUTION

A. Aravindhan1, Dr. R. Thanga Prashath2

1
M.B.A., M.Phil., Ph.D., Research scholar, 2AssistantProfessor& Research Supervisor
PG & Research Department of Management
Srimad Andavan Arts & Science College (Autonomous)
Tiruvanaikovil (P), Srirangam(Tk), Trichy District, Tamilnadu, (India)
ABSTRACT
The non-banking financial companies (NBFCs) flourished in India in the decade of the1980s against the back
drop of a highly regulated banking sector. While the simplified sanction procedures and low entry barriers
encouraged the entry of a host of NBFCs, factors like flexibility, timeliness in meeting credit needs and low
operating cost provided the NBFCs with an edge over the banking sector.NBFCs proliferated by the early
1990s. This rapid expansion was driven by the scope created by the process of financial liberalization in fresh
avenues of operations in areas, such as, hire purchase, housing, equipment leasing and investment. The
business of asset reconstruction has recently emerged as a green field within this sector following the passage of
the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act,
2002.NBFCs are financial intermediaries engaged primarily in the business of accepting deposits delivering
credit. They play an important role in channelising the scarce financial resources to capital formation. NBFCs
supplement the role of banking sector in meeting the increasing financial needs of the corporate sector,
delivering credit to the unorganized sector & to small local borrowers. All NBFCs are under direct control of
RBI in India. Paper highlights on review of impact of service quality of NBFC.
Key words: Non banking financial institution, Classification, and its service quality & its impact
on the success of NBFC.

I. INTRODUCTION
Non Banking Financial Companies (NBFCs)
According to the Reserve Bank of India Amendment Act 1997 the Non Banking Finance
company was defined as under:-
⇒A financial institution which is a company,

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⇒A non banking institution which is a company and whose principal business is to receiving of deposits under
any scheme/arrangement/in any other manner or lending in any manner and
⇒Other non banking institutions/class of institutions as the RBI may specify.
The directions apply to a NBFC which is defined to include only non-banking institution,which is any hire-
purchase finance, loan or mutual benefit financial company and an equipment leasing company but excludes an
insurance company/stock exchange/stock broking company /merchant banking company.
The RBI (Amendment) Act, 1997defines NBFC’S as an Institution or company whose principal business is to
accept deposits under any scheme or arrangement or in any other manner, and to lend in any manner. As a result
of this new definition, a number of loan and investment Companies registered under the Companies Act by
Business houses for the purpose of making
investments in group of companies are now included as NBFC. The Financial intermediaries in Indian Financial
System are broadly characterized by Public owned, Monopoly or Oligopoly or Monopolistic market structure
and are centralized. The Indian financial system has another part which comprises a large number of private
owned, decentralized, and relatively small sized financial intermediaries and which makes a more or less
competitive market. Some of them are fund based, and are called (NBFCs) and some are provide financial
services (NBFSCs) Both NBFIs, NBFCs are (1) Loan companies (LCs) (2) Investment companies or ICs (3)
Hire-Purchase finance companies or HPFCs (4) Lease finance companies or LFCs (5) Housing finance
companies (or) HFCs (6) Mutual Benefit financial companies or MBFCs (7) Residuary
non-banking companies or RNBCs (8) Merchant Banks (9) Venture capital funds (10)
Factors (11) Credit Rating Agencies (12) Depositories and custodial services.

Classification of NBFCs
Classification of NBFCs as given in the Reserve Bank Amendment Act 1997, 1) Equipment leasing company
(ELC): Carrying on as its Principal Business, the activity of leasing of equipment. 2) Hire Purchase finance
company (HPFC): Carrying hire purchase transactions (or) financing of such transactions. 3) Housing finance
company (HFC). 4) Investment Company (IC): Carrying the business of acquisition of securities. 5) Loan
Company (LC): Financing by making loans and advances. (Does not include ELC, HPFC, HFC).6) Mutual
Benefit companies (MBFC). 7) Residual non-banking company (RNBC): Company which receives any deposit
under any scheme or arrangement, in one lump sum or in installments by way of contributions or subscriptions
or by sale of units or certificates or other instruments or in any other form according to definition of NBFC. 8)
Miscellaneous non-banking companies (MNBC): Managing,
Conducting or supervising as a promoter foreman or agent of any transaction or arrangement.
Ex: conducting any other form of Chit and Kuri which is different from
type of business mentioned above. After the above classification the Non Banking Financial companies were re-
classified twice, during 1998 it was classified as four types they were 1) Equipment leasing, 2) Hire Purchase, 3)
Investment Company and 4) Loan Companies.
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During 2006 the NBFCswere reclassified as three types they are 1) Asset Finance companies (in this
bothEquipment Leasing and Hire Purchase companies were merged), 2) Investment Companies and 3) Loan
Companies
Apart from those classifications, in order to operate these NBFCs smoothly certain regulations/directions were
issued they are a) Regulations for deposits for NBFCs accepting deposits, b) Regulations for NBFCs not
accepting deposits and c) Regulations for core investment companies to smooth functioning of their businesses
as well as to give confidence to the participants as well as operators.
In a very broad sense, NBFIs would include even financial institutions like insurance companies, Life insurance
Corporation of India, Unit Trust of India, Industrial Credit and Investment Corporation of India Ltd., Industrial
Finance Corporation of India and Industrial Reconstruction Corporation of India Ltd., as also State Financial
Corporations. But for the purpose of our present study, the scope of the term is confined to the types of financial
companies enumerated in clause (p) of paragraph 2(1) of the Non-Banking Financial Companies (Reserve Bank
) Directions, 1966, which mobilize savings of the community by way of deposits or otherwise and utilize them
for the purpose of lending or investment. Thus the NBFCs that we shall discuss here are hire-purchase finance,
housing finance, investment, loan, miscellaneous financial or mutual benefit financial companies but excluding
insurance, stock exchange or stock broking companies. Non-banking financial companies (NBFCs) encompass
an extremely heterogeneous
group of intermediaries. They differ in various attributes, such as, size, nature of
incorporation and regulation, as well as the basic functionality of financial intermediation. Notwithstanding their
diversity, NBFCs are characterised by their ability to provide niche financial services in the Indian economy.
Because of their relative organisational flexibility leading to a better response mechanism, they are often able to
provide tailor-made services relatively faster than banks and financial institutions.

II. REVIEW LITERATURE

In this chapter an attempt has been made to analyse the various studieson different views of banking industry
related to the present study. Anumber of studies have been carried out on different aspects of customerservices
by the researchers, economists and academicians of Indians andabroad. Some of the important studies conducted
on customers services ofbanking sector are reviewed here. The reviews keep the researcher toidentify the
research gap and formulate a better analysis.
Zeithmal et al., (1990)1 analysed profitability positions of banks andgrowth of client base are interlinked. With
intensifying competition in themarket, it is very important for the banks to understand “How customerschoose
their banks?”. Then only banks can take proper marketing efforts toincrease client base. Improper identification
of true determinants ofconsumers‟ bank selection decision may result in poor results for marketingefforts.
Management‟ s failure to identify customers‟ desire is one kind ofquality gap.

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Gerrard and Cunningham (2001)2 in their study, conducted inSingapore, investigates three important aspects
of service quality. Thesample customers of two specific banks, one of which is publicly quoted andone of which
is fully government owned. For comparative purposes, five
service quality dimensions, which the authors created, were used. The resultsshowed that customer expectations
about an excellent bank's service qualitywere not significantly different as between the public sector bank and
thegovernment bank. The perceptions that consumers had about the servicequality of the bank they patronized,
though, showed some significantdifferences. The public sector bank was perceived as having a
significantlybetter 'services portfolio', specifically in regard to making customers awareof its services and
offering a variety of services through its AsynchronousTransfer Mode (ATM). The government bank was
perceived as havingbetter 'staff who deliver the service', specifically in the way the staff dressed
and the efficiency with which they served customers. The five servicequality dimensions were found to have
better predictive capabilities for themeasurement of the overall satisfaction of customers who patronised
thegovernment bank.
Hays and Hill (2001)3 in their article explained that most expertsagree that a learning organization whose
employees have a clear vision ofthe importance of service quality and are motivated to provide that qualitywill
achieve superior service quality. It develop a theoretical framework andconduct a cross-sectional empirical
study to investigate the interrelationshipsamong these constructs. The results indicate that higher levelsof both
employees‟ motivation/vision and organizational learning positivelyaffect perceived service quality.
Additionally, employees‟ motivation/visionwas found to mediate the relationship between organizational
learning andperceived service quality. These results highlight the importance of
employees‟ motivation/vision in both the service and the learning process.
Li et al., (2001)4 in their study found that as an international financialcenter, the banking industry in Hong
Kong (HK) plays a significant role.Because of increasingly competitive pressure from domestic and
overseasbanks, HK banks must tightly control cost and improve quality andefficiency of operations in order to
maintain profitability. For this purpose,quality management has emerged as an effective tool in recent years. In
fact,it has been regarded as a vital strategic element for meeting the challenge ofthe new and intensified
competition in the financial services industry. Thispaper reports the result of a survey on quality management
initiatives inHK‟ s banking industry between 1997 and 2000. The trend of changes inthese years is analyzed and
the results from HK are compared with thosefrom British financial institutions. The results show that HK banks
havegradually adopted quality initiatives and gained significant success in qualitymanagement over the past 3
years. They focused more on meeting servicestandard and providing prompt services while banking institutions
in the UKfocused more on understanding and meeting customers‟ needs.
Newman (2001)5in his paper presents a case study of a pioneeringnationwide implementation of SERVQUAL
by a major United Kingdom(UK) high street bank between 1993 and 1997 at an annual cost of onemillion
pounds. In addition to highlighting serious weaknesses in the value

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of SERVQUAL as a measure of service quality and as a diagnostic tool, thisstudy raises some of the practical
difficulties entailed in its implementation.Moreover, in this particular instance, it becomes apparent that
difficulties areintroduced by the separation of service quality management from themanagement of marketing
and human resources. In addition, there was a
discernible lack of top management commitment, as well as obstacles in theform of functional and informational
silos, which served to constrain anintegrated company response to SERVQUAL criteria.
Hussein A Hassan Al-Tamimi and Abdullah Al-Amiri (2003)6discussed in their article that it is generally
agreed that service quality inbanking is a significant issue facing this industry. The objective of this studyis to
analyse service quality in the UAE Islamic banks and to compareservice quality between the Dubai Islamic
Bank and the Abu Dhabi IslamicBank. Linear regression results indicate that there was a positive
andstatistically significant relationship between overall service quality and theSERVQUAL dimensions in the
UAE Islamic banks. It was also found thatempathy and tangibles were the most important dimensions. Analysis
of
covariance(ANOVA) results showed that there was no significant differencebetween the level of overall service
quality in the Dubai Islamic Bank andthe Abu Dhabi Islamic Bank. ANOVA results also indicate that there was
nosignificant difference in the level of service quality in the UAE Islamicbanks based on the customer's gender
and nationality. The results indicate,however, that there was a significant difference in the level of service
qualityin the UAE Islamic banks based on the customer's age, education andnumber of years with the bank.
Yonggui Wang et al., (2003)7 in their paper deals with although anincreasing number of studies is being
performed in the field of servicemanagement, less work is being done on an integrated framework of
servicequality and product quality, especially that supported with evidence fromdeveloping countries. As a
result, little is known about the distinctionbetween service quality and product quality, their respective
antecedents,and their distinctive contributions to performance in service industries in thedeveloping world.
Generalization of related findings from developedcountries is not necessarily appropriate. Unlike most related
studies that arebased on evidence from developed countries, focuses attention on thedistinction between, and
respective antecedents of, service quality andproduct quality in the Chinese context.
Chaisomphol Chaoprasert and Elsey (2004)8 in their paperdiscussed that at the retail level, service quality is
a key factor in consumersatisfaction with his or her bank. This article examines commitment to andemphasis
within service quality. Despite the rapid growth in electronicbanking it was found that in Thailand the emphasis
has been on improvingpersonal counter services. A model for investigating service in a retailbanking
environment is set out in the article.
Charalambos Spathis et al., (2004)9 in their paper discussed theservice quality of Greek banks on the basis of
their customers‟ perceptions,and analyses how gender differences affect customers‟ perceptions ofservice
quality dimensions such as effectiveness and assurance, access,price, tangibles, service portfolio, and reliability.
The results of an empiricalstudy of 1,260 customers of Greek banks generally support the hypothesisthat gender
affects service quality perceptions and the relative importanceattached to various banking service quality
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dimensions. This paper providesimportant information for bank managers to use in developing
operational,human resource, and marketing strategies, and in targeting those strategies interms of the gender
differences in quality perceptions among theircustomers.
Ugur Yavas et al., (2004)10 in their article examines the nature ofrelationships between service quality,
background characteristics, andsatisfaction and selected behavioral outcomes by using retail banking inGermany
as its setting. Study results show that service quality is at the rootof customer satisfaction and is linked to such
behavioral outcomes as wordof mouth, complaint, recommending and switching. However, differentaspects of
service quality and different customer characteristics seem to beassociated with different outcomes. For
instance, the results suggest thattangible elements of service quality and being a female are more
closelyassociated with positive word of mouth and commitment. On the other hand,“timeliness” aspects of
service delivery are more closely related to customersatisfaction, and complaint and switching behaviors.
Implications of theseresults to induce greater customer satisfaction, to attain higher levels offavorable outcomes
and to alleviate negative outcomes are discussed.
Mohammed Al-Hawari et al., (2005)11 explained in their paper thatautomated service quality has been
recognised as the factor whichdetermines the success or failure of electronic commerce. Those modelscurrently
available to measure automated service quality are limited in theirfocus, encompassing only one electronic
channel the internet therebyignoring attributes of the other automated service channels. In relation to thebanking
sector, research has identified that bank customers tend to use acombination of automated service channels. As
such, this research strives todevelop a comprehensive model of banking automated service quality taking
into consideration the unique attributes of each delivery channel and otherdimensions that have a potential
influence on quality issues. The proposedmodel has been empirically tested for unidimensionality, reliability,
andvalidity using factor analysis.

III. FINDINGS
The above review literature shows that the most important service quality practice on customer satisfaction
isresponsiveness as it is perceived as a dominant service quality. The results reveal that the service
qualitydimensions of tangibles, responsiveness, reliability and assurance are positively and significantly
influencing thecustomers overall satisfaction, while the empathy is negatively and significantly influencing the
customers overall satisfaction. Thus, this present research concluded that service quality is the basic and also
most important factor that influences the overall customer satisfaction. This finding reinforces the need for
banks managers to place an emphasis on the underlying dimensions of service quality especially on
responsiveness and should start with improving service quality in order to raise overall customer satisfaction.
Further, this study is consistent with those of prior research in concluding that: service quality is a significant
influence of overall customer satisfaction, and service quality dimensions are the basic factors that affect overall
customer satisfaction. It is apparent that focusing on delivering high quality services and improve service quality
effectively is critical for customer satisfaction. In addition, the satisfaction of customers was significantly
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influenced by the (Tangibles, Responsiveness, Reliability and assurance). It is thus apparent that managers of
new private sector banks could make assessing and monitoring service quality in banks periodically, to enable
the banks to identify where improvements are needed from the customers' viewpoint and to place an emphasis
on the underlying dimensions of service quality, especially on responsiveness and should start with improving
service quality in order to raise overall customer satisfaction.

IV CONCLUSION
Review highlights that mediating effect of service quality of non banking financial institution plays effective
role in identifying customer needs based on their socio-demographic profile, launching of various financial
product according to their needs and desire with valid consent of services benefitting customers as well the
financial institutions. Besides that service quality of non banking financial institution depends on digital services
in order attain accuracy and reducing the time consumptions of customers. A Service provider has to be
motivated and trained to achieve the target group in turn with attractive increments and incentives. On the whole
service quality ultimately relies on the risk and return analysis of financial products they reap and enjoy long
term satisfaction and pleasure.

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