COMPARISON OF INDIAN PUBLIC VS. PRIVATE SECTOR BANKS: A STUDY ON DIFFERENCES IN ESTIMATED AND ACTUAL COST FOR LOAN BORROWERS

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1 ISSN: IJMRR/ July 2014/ Volume 4/Issue 7/Article No-4/ Ruchi Bhatia et. al./ International Journal of Management Research & Review COMPARISON OF INDIAN PUBLIC VS. PRIVATE SECTOR BANKS: A STUDY ON DIFFERENCES IN ESTIMATED AND ACTUAL COST FOR LOAN BORROWERS ABSTRACT Ruchi Bhatia* 1, Dr. Jayender Verma 2 1 Research Scholar, Manav Rachna International University, India. 2 Assoc. Prof, Manav Rachna International University, India. Individuals differ in their preference of borrowing money owing to differences in their reasons of borrowing, amount of borrowing, quantum of borrowing, source of borrowing and so on. Nonetheless, a detriment faced by individuals in enjoying the benefits of financing the personal requirements is cost which happens to be in the nature of interest obligation required to be paid to the lender. Borrowing costs refer to the expense of taking out loan expenses like interest payments incurred from a loan or any other kind of borrowing including processing and other charges. However, at times, individuals often complain about the difference in the estimated cost of borrowing as reported by the banker/s and the actual cost incurred by the borrowing. The present study is an endeavor to analyze from the Indian urban borrower s point of view whether these differences really exist or not. In relation to the above, a comparative study between public sector and private sector banks is done. The study proves that the Indian public sector banks are more truthful in comparison to their private sector counterparts. Keywords: Banking, Debt, Loans, Credit, Borrowing, Cost of Borrowing. INTRODUCTION The history of credit dates back to the emergence of mankind. When a person requires something materialistic, then he usually follows two available courses of actions, one is ethical and the other is unethical. Credit market today has picked up a pace that is much more mature and transparent as compared to its counterpart in the past. Individuals differ in their preference of borrowing money as to their reason for borrowing, amount of borrowing, quantum of borrowing, source of borrowing and so on. Nonetheless, a detriment faced by individuals in enjoying the benefits of financing the personal requirements is cost which happens to be in the nature of interest obligation required to be paid to the lender. There are different reasons to accept the choice of becoming indebted. A loan may be borrowed to buy a home, buy a car, pay the fee for higher education, payoff previous loan, loss of a job, personal or family illness, overspending or may be to finance a wedding or so on. Among those households who are reaping the benefits of easily available and reasonably priced debt, there are individuals/households who at times fail to meet the payment deadlines and therefore have to bear the brunt of penalties imposed on them by their respective lenders. *Corresponding Author 732

2 Cost of borrowing can be defined as the total charge for taking on a debt obligation involving interest payments and other financing fees. In a more technical way, borrowing costs refer to the expense of taking out loan expenses like interest payments incurred from a loan or any other kind of borrowing including processing and other charges. The total interest cost of any loan always holds a direct relationship with its interest rate. This brings in light the importance of taking rational decisions regarding exercising the option of seeking credit. Managing debt efficiently and effectively needs endeavors to minimize the cost of borrowing and simultaneously to manage the risks involved in borrowing. However, in this process, it is equally important to select the lender prudently. ABOUT BANKING SECTOR The Indian Banking Industry is governed by the Banking Regulation Act of India, After the creation of the RBI in 1935, banks were divided into scheduled and non-scheduled banks. Scheduled banks comprise of commercial banks and co-operative banks, In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group of banks, regional rural banks and the private sector banks including domestic as well as foreign banks. Rural group includes all centres with population of less than 10,000. Semi-urban group includes centres with population of 10,000 and above but less than 1 lakh. Urban group centres with population of 1 lakh and above but less than 10 lakh. Metropolitan group includes centres with population of 10 lakh and more. Banks in India have traditionally offered mass banking products that included the most common deposit products like Savings Bank, Current Account, Term deposit Account and lending products like Cash Credit and Term Loans. In view of several developments in the 1990s, the entire banking products structure has undergone a major change. As part of the economic reforms, banking industry has been deregulated and made competitive. IT revolution and exposure to global trends has turned the financial market into a buyer's market. Banks are also changing with time and are trying to become one-stop financial supermarkets. New distribution channels are being used; more & more banks are outsourcing services Home banking has already become common. Products like debit cards, flexi deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle loans have been introduced by a number of banks. OBJECTIVES OF THE STUDY The present study is an endeavour to evaluate whether there exist any difference between the estimated cost of borrowing and the actual cost paid by the borrowers. The study will also strive to make a comparison between various banks and between public sector banks and private sector banks on the same issue. RESEARCH METHODOLOGY The design of the research is descriptive. Questionnaire was the only formal research instrument used for the study. The first part of the questionnaire captured information on the demographics of the respondents. The second part dealt on the type, amount and duration of the loan/credit along with the repayment schedule of the same. Questions were also targeted to identify the satisfaction level of borrowers related to the consistency between the estimated Copyright 2012 Published by IJMRR. All rights reserved 733

3 cost of borrowing as told by the banker concerned and the actual cost of debt. The questionnaire made use of nominal, interval and ratio scales. The researcher resorted to a choice-based or convenient sampling approach for selecting the respondents for this survey. The data was collected through primary as well as secondary sources. Primary data was collected by administering the pre-tested questionnaire to the selected respondents. The sample size for the study was 300 respondents who must have borrowed home loan, auto loan, education loan, personal loan or use credit card of one of the chosen six banks (three public sector banks and three private sector banks) and their debt still exists. The banks were chosen on the basis of maximum number of branches in India. Secondary data was collected from various websites, publications including books, journals, magazines, newspapers and periodicals of government and reports of Reserve Bank of India. The researcher has formulated the following hypothesis to fulfill the objective mentioned above: H1 O The actual cost of borrowing is equal to the cost declared by the banking authorities H1 A The actual cost of borrowing is equal to the cost declared by the banking authorities ANALYSIS AND INTERPRETATION Since there are more than two groups (six banks) and the borrower s opinion on the difference of the actual cost and the estimated cost reported by banks is measured on an interval scale, ANOVA is appropriate to test this hypothesis. Borrower s opinion is captured for five different categories of loans/ credit chosen for the study, viz. home loan, vehicle/ auto loan, education loan, personal loan and credit cards. Home Loan Table 1: Descriptive No difference in actual and estimated cost of debt N Mean Std. Dev. Std. Error 95% Confidence Lower Upper Minimum Maximum Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Total Table 2: ANOVA- No Difference in Actual and estimated Cost of Debt Between Groups Within Groups Total Sum of Squares df Mean Square F Sig In this case, F = This F-value is highly significant at.000 level. This implies that the hypothesis 3 is substantiated. That is, there are significant differences in the mean satisfaction of borrowers related to the costs from the six banks, and the null hypothesis is rejected. Copyright 2012 Published by IJMRR. All rights reserved 734

4 Though there are differences in the response set of borrowers within each bank, but the differences between banks is more significant. To determine among which groups the true differences lie, Duncan Multiple Range Test was performed for the purpose. Table 3: Duncan No difference in actual and estimated cost of debt Home Loan Bank N Subset for alpha = 0.05 Public Sector Bank Public Sector Bank Public Sector Bank Private Sector Bank Private Sector Bank Private Sector Bank Sig The results show that the mean difference in the costs for the private sector banks is significantly different from the public sector banks. The maximum difference is found in the responses of home loan borrowers of private sector bank 1. Vehicle/ Auto Loan Table 4: Descriptive No difference in actual and estimated cost of debt N Mean Std. Dev. Std. Error 95% Confidence Lower Upper Minimum Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Total Table 5: ANOVA No difference in actual and estimated cost of debt Sum of Squares df Mean Square F Sig. Between Groups Within Groups Total Maximum In this case, F = This F-value is not significant at.326 level. This implies that the hypothesis 3 is not substantiated. That is, the differences in the mean satisfaction of borrowers related to the costs from the six banks are not significant, and the null hypothesis is accepted. Copyright 2012 Published by IJMRR. All rights reserved 735

5 Table 6: Duncan No difference in actual and estimated cost of debt Vehicle Loan Bank N Subset for alpha = 0.05 Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Sig The results show that the mean difference in the responses of vehicle loan borrowers from the private sector banks related to costs is significantly different from the public sector banks. Lowest difference is encountered in public sector bank 2 and maximum in private sector bank 2. Education Loan Table 7: Descriptive No difference in actual and estimated cost of debt N Mean Std. Std. Deviation Error 95% Confidence Lower Upper Minimum Maximum Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Total Table 8: ANOVA No difference in actual and estimated cost of debt Sum of Squares df Mean Square F Sig. Between Groups Within Groups Total In this case, F = This F-value is significant at.007 level. This implies that the hypothesis 3 is substantiated. That is, the differences in the mean satisfaction of borrowers related to the costs from the six banks are significant, and the null hypothesis is rejected. Though significant differences in the responses of the borrowers are being encountered within the banks, there are highly significant differences between the banks in the responses of the education loan borrowers. To determine among which groups the true differences lie, Duncan Multiple Range Test was performed for the purpose. Copyright 2012 Published by IJMRR. All rights reserved 736

6 Table 9: Duncan No difference in actual and estimated cost of debt Education Loan Bank N Subset for alpha = 0.05 Public Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Private Sector Bank Sig The results show that the mean difference in the costs for the private sector banks is not significantly different from the public sector banks. Lowest difference is found in public sector bank 1 and highest in private sector bank 1. Personal Loan Table 10: Descriptive No difference in actual and estimated cost of debt N Mean Std. Std. Deviation Error 95% Confidence Minimum Maximum Lower Upper Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Total Table 11: ANOVA No difference in actual and estimated cost of debt Sum of Squares Df Mean Square F Sig. Between Groups Within Groups Total In this case, F = This F-value is not significant at.348 level. This implies that the hypothesis 3 is not substantiated. That is, the differences in the mean satisfaction of borrowers related to the costs from the six banks are not significant, and the null hypothesis is accepted. To determine among which groups the true differences lie, Duncan Multiple Range Test was performed for the purpose. Copyright 2012 Published by IJMRR. All rights reserved 737

7 Table 12: Duncan No difference in actual and estimated cost of debt Personal Loan Bank N Subset for alpha = 0.05 Public Sector Bank Public Sector Bank Private Sector Bank Private Sector Bank Private Sector Bank Public Sector Bank Sig..083 The results show that the mean difference in the costs for the private sector banks is significantly different from the public sector banks. Lowest difference is found in public sector bank 2, whereas the highest difference is encountered in public sector bank 3. Credit Card Table 13: Descriptive No difference in actual and estimated cost of debt N Mean Std. Deviation 1 Std. Error 95% Confidence Lower Upper Minimum Maximum Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Public Sector Bank Private Sector Bank Total Table 14: ANOVA - No difference in actual and estimated cost of debt Sum of Squares Df Mean Square F Sig. Between Groups Within Groups Total In this case, F = This F-value is not significant at.379 level. This implies that the hypothesis 3 is not substantiated. That is, the differences in the mean satisfaction of borrowers related to the costs from the six banks are not significant, and the null hypothesis is accepted. To determine among which groups the true differences lie, Duncan Multiple Range Test was performed for the purpose. Copyright 2012 Published by IJMRR. All rights reserved 738

8 Table 15: Duncan No difference in actual and estimated cost of debt Credit Card Bank N Subset for alpha = 0.05 Public Sector Bank Public Sector Bank Private Sector Bank Private Sector Bank Private Sector Bank Public Sector Bank Sig The results show that the mean difference in the costs for the private sector banks is not significantly different from the public sector banks. And the lowest difference is found in public sector bank 3 whereas maximum difference is encountered in the responses of the credit card users of public sector bank 1. CONCLUSION For home loan, vehicle loan and personal loan, there were significant differences between public sector banks and private sector banks in the mean satisfaction of borrowers related to the costs from the six banks. Insignificant differences between the banks from the two sectors were found in education loan and credit card. However, there are significant differences in the borrower s responses between all the chosen banks for education loan. Private sector bank 1 bank reports the maximum difference for its home loan and education loan, whereas maximum difference in the responses of vehicle loan borrowers, personal loan borrowers and credit card users were encountered in private sector bank 2, public sector bank 3 and public sector bank 1 respectively. Lowest differences were witnessed by public sector bank 2 for its vehicle loan and personal loan, whereas for education loan and credit card, the public sector bank 1 and public sector bank 3 respectively marks the minimum mean differences. In nutshell, the public sector banks outperform their private sector counterparts while making their customers aware on the cost aspect of their borrowing from them. REFERENCES [1] Branch Banking Statistics. Reserve Bank of India. Mumbai. March 2009; 4. [2] Davis J. Advertising Research Theory and Practice. New Jersey: Prentice Hall Inc, [3] Dhillon G. Interpreting the Management of Information Systems Security. Unpublished Doctoral Dissertation, London School of Economics and Political Science, England, [4] Jain T, Aggarwal S. Quantitative Methods. India: V.K. (India) Enterprises, [5] Malhotra N, Birks D. European Ed. Marketing Research: An Applied Approach. Essex: Prentice Hall, [6] Report on Trend an Progress of Banking in India RBI. Mumbai: Mohua Roy for RBI. Copyright 2012 Published by IJMRR. All rights reserved 739

9 [7] Internet Banking and Customer Acceptance: The Indian Scenario. Thesis, Cochin University of Science and Technology, Department of Applied Economics, Cochin, [8] Copyright 2012 Published by IJMRR. All rights reserved 740