Linkage between service quality and customer loyalty bank

International Journal of Management & Strategy July-Dec.2010 Vol.1,No.1

LINKAGE BETWEEN SERVICE QUALITY AND CUSTOMERS LOYALTY IN COMMERCIAL
BANKS

S. Dhandabani, PhD, Assistant Professor, S.S.T College, Coimbatore, T.N,India

ABSTRACT
This study examines the nature of linkage between service quality and customer loyalty in Indian retail
banking. Study used confirmatory factor analysis to identify the service quality dimension. The resulted
dimensions are Reliability, Responsiveness, Knowledge and recovery; and Tangibles. The service
quality dimensions lead to customer satisfaction and the customers’ satisfaction leads to customer’s
loyalty. The structural equation model reveals that there is no significant direct linkage between service
quality and customers loyalty. At the same time, the service quality has a significant indirect impact on
customer’s loyalty especially through customer’s satisfaction. The study indicates that the bank
managers need to develop a systematic assessment programs to monitor service quality and customers
satisfaction over time. Once the service culture is established, that will lead to customer satisfaction.
And customer satisfaction result in customer’s loyalty.

Keywords: Banks Customer, Loyalty, Responsiveness, Service, Satisfaction

INTRODUCTION

During the past two decades or so, regulatory, structural and technological factors have
significantly changed the banking environment throughout the world (Angur et al., 1999). In a
milieu which becomes increasingly competitive, service quality as a critical measure of
organizational performance continues to compel the attention of banking institutions and remains
at the forefront of services marketing literature and practice (Lasser et al., 2000; Yavas and
Yasin, 2001). The interest is largely driven by the realization that higher service quality results in
customer‟s satisfaction and loyalty, greater willingness to recommend to someone else, reduction
in complaints and improved customer retention rates (Danaher, 1997; Magi and Julander, 1996;
Levesque and McDongall, 1996).

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Undoubtedly owing to the belief that delivery of higher service quality is a must for
attaining customers satisfaction and a number of other desirable behavioural outcomes, recent
years have witnessed a flurry of research exploring inter relationship between service quality and,
satisfaction and behavioural outcomes (Festus and Hsu, et al., 2006; Thamariselvan and Raja,
2007). This study expands the research stream into India. The specific objectives of the study
are:

to reveal the dimensions of service quality in commercial banks.

to examine the inter relationship between exogenous and endogenous variables and

to study the direct and indirect effects of service quality on customer loyalty.

A study addressing these issues is relevant and significant for at least three reasons. First,
while much is known about the items in the SERVQUAL instrument that are global in nature, the
outcome of administering the SERVQUAL scale to the consumers of a service is of little utility
value for instituting an operational instrument process for the service. Some researchers
(Babakus and Boler, 1992; Lapierre, 1996; Levitt, 1981) have suggested that the search of
universal conceptualization of the service quality construct may be futile, and to be a practical
utility, a service construct should not only be operational, but also context specific.

Secondly, while much is known about the relationships between service quality,
satisfaction and behavioural outcomes as a result of research initially as conducted in the USA
and England (Angur et al., 1999; Jamal Nasser, 2002; Yavas et al., 1997; Anthanassapoulous, et
al., 2001), still there is a paucity of research dealing with these issues in the context of India.

Thirdly, in today‟s fiercely competitive Indian banking environment, where Indian bankers
consider delivery of excellent service quality to customers as a key to success and survival, the
findings from the study can provide them with valuable insights in ways of enhancing service
quality to induce greater customer satisfaction and customers loyalty.

CONCEPTUAL FOUNDATIONS

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Over the past 40 years, several authors have attempted to develop coherent classification
schemes for services. The intent of such schemes is to bring parsimony and order to allow a
better understanding of the characteristics that differentiate services and the organizations that
provide them. The following section reviews some of these schemes.

Service Quality

Service quality is considered a multi-attribute construct-the product of the comparison
between the customers expectations and their perceptions of the company‟s actions (Parasuraman
et al., 1985; 1998; Boulding et al., 1993; Gronroos, 1994). Perceived service quality has been
defined as the consumer‟s global attitude or judgement of the overall excellence or superiority of
the service. Perceived service quality results from comparisons by consumers of expectations
with their perceptions of service delivered by suppliers (Lewis et al., 1994; Takeuchi and Onelch,
1983; Zeithaml, 1988). Customers expectation are beliefs about a service that serve as standards
against which service performance is judged (Zeithaml et al., 1993); what customers think a
service provider should offer rather than what might be on offer (Parasuraman et al., 1988).
Expectations are formed from a variety of sources such as the customer‟s personal needs and
wishes (Edvardsson et al., 1994).

Measurement of Service Quality

The SERVQUAL instrument proposed by Parasuraman et al., (1988) posits the computed
disconfirmation approach whereby the difference between a customer‟s expectation and the
actual performance is calculated. This approach has been criticized by several authors for a
number of weaknesses. The alternative approach namely SERVPERF, is that measurement of the
customer‟s perception of the performance of a service which provides adequate assessment for
service quality (Gronroos, 1988; 1990; Cronin and Taylor, 1992; Peter et al., 1993; Brown et al.,
1993; Bebko, 2000). The increasing support on the measurement of service quality by
performance-only measurement (SERVPERF) is witnessed (Andaleeb, and Basu, 1994; Zeithaml,
1996 and Cronin et al., 2000). Since the weight of evidence in the literature supports the use of

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performance perception, the present study adopts the “SERVPERF” scale to measure service
quality.

Service Quality Dimension in Commercial Banks

Several researchers have suggested that the search for universal conceptualization of the
service quality construct may be futile (Levist, 1981; Lovetock, 1983). The service quality
construct is either industry or context specific (Babakus and Boller, 1992). The measurement of
the service quality construct is multidimensional. In its original structure, service quality consists
of five dimensions (Parasuraman et al., 1988; Carman, 1990; Rust and Oliver, 1994). These are:

1. the tangibility aspects of the service
2. the reliability of the service provider
3. the assurance provided by the service provider
4. the responsiveness of the service provider; and
5. the service provider‟s empathy with customers

The included variables to measure the service quality of commercial banks were ranging
from seventeen to fifty seven variables (Narul Islam, 2005; Verma and Vehra, 2000; Sharma and
Mehta, 2004; Elango and Gudep, 2006; Sharma and Sharma, 2007; Bhat, 2004; Levesque and
Gorden, 1996; Bhat, 2005; Zillur, 2005; Gani and Bhat, 2003). In the present study, the included
service quality variables are twenty seven (See Table 1).

Customer Satisfaction

Several studies seem to conclude that satisfaction is an affective construct rather than a
cognitive construct (Oliver, 1997; Olsen, 2002). Cronin et al., (2000) assessed service
satisfaction using items that include interest, enjoyment, surprise, anger, wise choice, and doing
the right thing. Rust and Oliver (1994) defined satisfaction as the “customer‟s fulfillment
response” which is an evaluation as well as an emotion-based response to a service. In the
present study, the more popular Westbrook and Oliver‟s (1991) four emotion-laden items have
been used.

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Perceived Value

Customers perceived services have been theoretically represented as consisting of two
dimensions. Berry and Parasuraman (1991) distinguish a process and an outcome dimension,
whereas Gronroos (1990) makes a distinction between functional and technical quality. The
process of functional quality refers to “how” the service is delivered, while the outcome or
technical quality refers to “what” customers perceive, the benefits of using the service. In the
commercial banks, how banking operations are being transacted as functional benefit, easy to use,
safety and confidence on the systems at banks are the benefits that customers perceive as
technical benefits. In the present study, the number of items used to measure the perceived value
on service is three (See. Table 1).

Customer’s Loyalty

According to a model presented by Zeithaml et al., (1996), behavioural intention can be
captured by such measures as repurchase intentions, words of mouth, loyalty, complaining
behaviour, and price sensitivity. High service quality often leads to favourable behavioural
intention (Burton et al., 2003). Loyal customers are important, because they contribute to the
bank‟s profitability by passing positive words of mouth and also retain their customership.
(Anderson and Mittal, 2000; Storbacka et al., 1994). Loyalty is predominantly satisfaction driven
(Rust et al., 1995) and therefore customers satisfaction measurements are believed to give a better
indication of future performance of service firms (Anderson and Fornell, 1999) than, for instance
financial and accounting based measures (Kaplan and Nortan, 1996). Customer loyalty is a
feeling of commitment on the part of the consumer to a product, brand, marketer, or services
above and beyond that for the competitors in the market place, which results in repeat purchase
(Szymigin and Carrigan, 2001). A loyal customer to a bank is thus, one who will stay with the
same service provider, is likely to take out new products with the bank and is likely to

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recommend the bank services (Fisher, 2001). The customer‟s loyalty towards the banks in the
present study is measured on the basis of three statements (Kish, 2000; Bridgewater, 2001).

Inter-Relationship among Service Quality, Customer Satisfaction and Customer Loyalty

There is no clear message in the literature on the causal ordering of service quality and
customers satisfaction, and on which of the two constructs is a better predictor of customer
loyalty (Bolton and Drew, 1991; Cronin and Taylor, 1992). One group of researchers upholds
that satisfaction is antecedent to service quality (Brady and Robertson, 2001). Dabholkar, 1995;
and Winstanley, 1997). Another group of researchers believe that the service quality is
antecedent to satisfaction (Brady and Robertson, 2001, Bloemer et al., 2002; Newman 2001). A
third perspective maintains that there is a non-recursive relationship between service quality and
satisfaction (Taylor and Cronin, 1994). The impact of service quality, customer satisfaction on
customer loyalty is complex. The present study, however predicts the direct and indirect effects
of service quality, customers satisfaction on customer loyalty with the help of structural equation
modeling. The proposed research model is presented in Figure 1.

FIGURE 1
Proposed Research Model

Reliability

Responsivenes
s
Service Perceived Customer Customer
Quality Satisfaction Loyalty
Quality
Knowledge
and Recovery

Tangibles

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RESEARCH MATHODOLOGY

Scale Development

Parasuraman et al. (1994) emphasized an alternative approach in giving customers
definitions related to five underlying dimensions of service quality and asking them to assign the
items into the dimension only on the basis of each items content. Similar to the essence of
Parasuraman et al.‟s approach, the questionnaire items in the present study were generated via a
series of focus groups. Specifically, the focus group customers comprised teams of customers
and bank officials of public and private sector banks. The research developed a service blue print
for commercial banks because this gives the customers an opportunity to better understand the
sequential stages of service encounter. The operational definition of the construct of perceived
quality (SERVPERF) was introduced to the customers prior to their development and verification
of the service quality measurement scale. The focus groups (bank officials) were requested to
check the variables included to measure the service quality of commercial banks.

TABLE 1
The Survey Instrument
Sl.No Particulars
I. Reliability
1. Error-free records
2. Timely Passion of service
3. Right at first time itself
4. Staffs sincerity in service
5. Providing service at promised time
6. Sincere in solving problems
II. Responsiveness
7. Employees adopt service to the customer needs
8. Staffs readiness to customers request
9. Customers informed about service performance

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10. Well handling of peak hours
11. Providing correct response to customers
12. Courteous among employees
13. Willing to help customers
III. Tangibles
`14. Attractive interior design
15. Upto-date equipment
16. Neat and professional appearance of employees
17. Confortable parking space
18. Visually appealing facilities
IV. Recovery
19. Employees empowered for correction
20. Response on Complaints
21. Quick Correction on mistakes made
22. Convenient operating hours
23. Personalized service

Sl.No Particulars
V. Knowledge
24. Customer Relationship
25. Knowledge of staffs
26. Awareness on Latest banking facts
27. Provision of adequate information
VI. Perceived Value
1. Navigation Easy
2. Safety
3. Confidence on Bank
4. Accessibility
VII. Customer Satisfaction
1. I am satisfied with my decision to choose this Bank
2. I did a right thing
3. My choice is a wise one
4. I feel good experience with this bank
VIII. Customer Loyalty
1. I am proud to be a customer of this bank
2. I want to continue as a customer of this bank
3. I recommend others about my bank

Each item of the service quality of commercial banks was rated on a five point likert type
of scale. In addition, the perceived value, customer satisfaction and customer loyalty were also
measured with the help of related statements.

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THE SAMPLE
Two waves of sampling took place in order to obtain a sufficient number of survey
respondents. In total, 20 Public Sector and 20 Private Sector banks in Madurai, Tamilnadu have
been purposively selected for the present study. From each bank, 10 customers are purposively
selected. The total sample size came to 400 customers. The response rate among the customers of
Public Sector and Private Sector banks are 64.00 and 76.00 per cent to its total respectively. This
generated total of 280 customers (128+152). Among the total customers, the important age group
is 46 to 50 which alone constitutes 41.21 per cent to the total. The important occupational
background among the customers are business and private employment which constitute 31.09
and 22.86 per cent to the total respectively. The important annual income among the customers
are Rs.15,000 to 20000 per month which constitutes 40.96 per cent to the total. Most of the
customers have an experience of 12-15 years in their present banks.

DATA ANALYSIS
The present study first reviewed the descriptive statistics (Mean, standard deviation,
coefficient of variation, kurtosis and skewness) in both samples and were satisfied with the data
distribution. Next, focusing on the customers of Public sector banks (Sample-1), the present study
used an iterated factor analysis with item commonality estimated from squared multiple
correlations, and maximum likelihood as the estimation method. This procedure resulted in a
four-factor solution that was rotated by a Promax algorithm (i.e. an oblique rotation). As a
conservative, heuristic, items with a loading small than 0.4 on any factor were deleted. Moreover,
items that demonstrated cross-loadings greater than 0.4 on more than one factor were also
dropped because they do not provide pure measures of specific construct. In addition, the scree
test and the Kaiser (1960) eigen value–one criterion were both used to identify the number of
factors. The results are given in Table 2.

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TABLE 2
Factor loadings for the underlying dimensions of service quality
Sl.No V.No Variabels ReliabilityResponsiveness Knowledge Tangibles
and
Recovery
1 V4 Staffs sincerity in service 0.8914
2 V2 Timely Provision of service 0.8622
3 V1 Error free records 0.7413
4 V6 Sincere in solving Problems 0.7028
5 V5 Providing service at promised 0.6541
time
6 V3 Right at first time itself 0.5191
7 V11 Providing correct response to 0.9127
customers
8 V9 Customers informed about 0.8096
services
9 V13 Willing to help customers 0.7539
10 V8 Staffs readiness to customer 0.7044
request
11 V10 Well handling at peak hours 0.6599
12 V21 Quick correction on mistakes 0.8968
made
13 V24 Customer Relationship 0.8213
14 V25 Knowledge of staffs 0.7908
15 V27 Provision of adequate information 0.6744
16 V23 Personalized service 0.5246
17 V18 Visually appealing facilities 0.8969
18 V16 Neat and Professional appearance 0.8203
of employees
19 V15 Upto date equipment 0.8456
20 V14 Attractive interior design 0.6339
Eigen value 7.5814 5.4117 2.8646 1.3309
Percent of variance explained 31.14 20.89 18.49 12.17
Cronbach alpha 0.7342 0.7817 0.7039 0.7324
*Factor loading less than 0.5 are not shown

Out of 27 service quality variables, seven variables were dropped because of their poor
factor loading (less than 0.4) and more than 0.4 in more than one factors. The 20 variables were
taken for the data validity test namely Kaiser-Meyer-Ohlin (KMO) measure of sampling
adequacy and Bartletts test of sphericity. Both the two tests satisfied the validity of data for factor
analysis. The factor analysis result in four important factors with the cumulative variance
explained of 82.69 per cent. The identified factors are Reliability, Responsiveness, Knowledge
and Recovery; and Tangibles. The above said service quality factors consist of 6,5,5 and 4

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variables with the reliability coefficient of 0.7342, 0.7817, 0.7039 and 0.7324 respectively.
Notably all of the calculated reliability coefficient are above the widely recognized rule of thumb
of 0.7 (Nunnally, 1978) which suggests a good internal consistency among item in this each
identified Dimension.
Guided by results generated from the above analysis, an informal Confirmatory Factor
Analysis (CFA) is made on a broader sample of customers in Private sector banks (Sample-2). An
iterated factor analysis with forced four-factor selection method resulted in a four-factor solution
that is analogous to the one reported in Table 3.
TABLE 3
Factor loadings for the underlying dimensions of service quality
Sl.No V.No Variabels ReliabilityResponsiveness Knowledge Tangibles
and
Recovery
1 V1 Error Free records 0.9133
2 V2 Timely Provision of Service 0.8646
3 V4 Staffs sincerity in service 0.7028
4 V5 Providing service at promised 0.6517
time
5 V6 Sincere in solving problems 0.5803
6 V9 Customers informed about 0.8403
services
7 V11 Providing correct response to 0.7868
customers
8 V13 Willing to help customers 0.6917
9 V8 Staffs readiness to customers 0.5803
request
10 V25 Knowledge of staffs 0.8917
11 V21 Quick correction on mistakes 0.7804
made
12 V27 Provision of adequate information 0.6517
13 V24 Customer Relationship 0.5964
14 V15 Upto date equipment 0.7914
15 V18 Visually appealing facilities 0.6306
16 V16 Neat and Professional appearance 0.5341
of employees
Eigen value 5.0817 3.4517 2.0862 1.1408
Percent of variance explained 31.58 21.41 20.71 12.39
Cronbach alpha 0.7414 0.7602 0.7334 0.7046
* Factor loading less than 0.4 are not shown

It is worth noting that refinement of items making up each dimension was done three times
to obtain a clean four-factor picture. Specially, variable-3 was deleted due to a lower than 0.3
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factor loading on factor-1 (Reliability). In addition, Variable No.10; No.23 and No.14 were
dropped to avoid the possible ambiguous dimensionality. They were associated with factor 2, 3
and respectively in Sample-1. The reliability and validity of data for factor analysis has been
conducted with the help of KMO measure sampling adequacy and Bartletts test of sphericity.
Both these tests satisfied the condition of validity of data also. The four factors namely
Reliability, Responsiveness, knowledge and Recovery; and Tangibles consist of 5,4,4 and 3
variables with the reliability coefficient of 0.7414, 0.7602, 0.7334 and 0.7046 respectively. All
the four factors explain the service quality in commercial banks to the extent of 86.09 per cent.
Assessing reliability and validity of constructs
It should be noted that a more rigid procedure was also performed to assess the
dimensionality of the service quality measure. Empirically, convergent validity (the degree if
association between measures of a construct) was assessed by reviewing the „t‟ tests for the factor
loadings. The composite reliability scores for each of four factors have been also computed. The
results are given in Table 4.

TABLE 4
Properties of the CFA for SERVPERF
Construct Items Standardised T- Composite
and Loading Statistics Reliability
Indicators
Service Reliability
Error free records 0.8303 14.18* 0.93
Timely provision of service 0.8517 15.48*
Staffs sincerity in service 0.9208 17.33*
Providing service at promised time 0.8417 14.91*
Responsiveness
Customers informed about service performance 0.8163 12.06*
Providing correct response to customers 0.7492 10.31* 0.82
Willing to help customers 0.8169 12.73*
Staffs readiness to customers request 0.6965 8.17*
Knowledge and recovery 0.6566 7.29*
Knowledge of staffs 0.8143 7.13* 0.87
Quick correction on the mistakes made 0.7309 6.96*
Provision of adequate information 0.6256 6.45*
Customer Relationship 0.6144 6.03*
Tangibles
Upto date equipment 0.8308 5.94* 0.86
Visually appealing facilities 0.7736 5.38*
Neat and professional appearance of employees 0.6943 5.11*

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The metric for each scale was established by fixing the coefficient for one indicator to 1.00 for
each of four factors. Other than the fixed loadings, each item evidenced highly significant „t‟
statistics (value < 0.01), suggesting that all indicator variables provide good measures to their
respective construct. Specifically, the entire set of indicators has a standardized loading higher
than 0.6256 with the highest being 0.9208. These results generally supported the convergent
validity of the indicators. (Anderson and Gerbing, 1988). Composite reliability is similar to
Cronbach alpha, and reflects in the internal consistency of the indicators measuring each
Confirmatory Factor Analysis construct (Fornell and Larcker, 1981). Results show that all four
factors have composite reliability scores greater than the commonly recommended 0.7
benchmark, and this suggests that each of the factors is reliably measuring its respective
constructs.

Discriminant Validity
It is not easy to establish discriminant validity. (the degree to which items of constructs are
district) when the involved constructs are theoretically related to a hierarchically high order
construct (i.e. service quality), as is the case here. The existence of a second order factor structure
suggests the sub-dimensions of service quality share common variance. However, discriminant
validity can be empirically assessed in a weak sense by using the confidence interval test (plus or
minus two standard deviations around the factor correlations). Discriminant validity is said to be
satisfied if a 95 per cent confidence interval of the inter-factor correlation between two constructs
does not include an absolute value of one (Anderson and Gerbeing, 1988). The Correlations
among all the constructs are presented in Table 5.

TABLE 5
Correlation Matrix for all exogeneous and endogenous Variables
Sl.No. Variables Reliability Responsive Knowledge Tangibles Perceived Customer Customer
ness and value Satisfaction loyalty
Recovery

1. Reliability 0.4617* 0.4208* 0.5168* 0.8234* 0.7186* 0.5163*
2. Responsiveness 0.6143* 0.4599* 0.7908* 0.6345* 0.5081*

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3. Knowledge 0.5347* 0.8189* 0.7408* 0.4408*
and Recovery
4. Tangibles 0.8406* 0.7902* 0.5244*
5. Perceived data 0.6904* 0.6508*
6. Customer 0.8147*
Satisfaction
7. Customer
Loyalty
*Significant at five per cent level.

Though some of the correlation coefficients were found to be relatively high, the 95 per
cent confidence intervals for the inter factor correlation were not found to include 1.0. As a result,
this confidence interval test tends to support to the discriminant validity of the studied constructs.

Impact of independent variable on dependent variable
The impact of service quality on perceived value, perceived value on customer
satisfaction, and customer satisfaction on customer loyalty have been estimated with the help of
structural equation Modeling. The fit indices like x2, RMSEA, TLI, AGFI, GFI, CFI and NFI
have also been computed. The implications of these with the proposed model are explained in
Table 6.

TABLE 6
Results of the Structural Equation Modeling
Sl.No Hypothesis Standardized t-Statistics p-Value
Data
1. Service Quality with 0.7134 6.1718 0.0244
Perceived value
2. Perceived value with 0.6291 5.2376 0.0139
Customer Satisfaction
3. Customer Satisfaction 0.5739 0.9708 0.0172
with Customer Loyalty
Fit Indices
Chi-square=113.08 RMSEA=0.041 TLI = 0.934
p-value (.0018)
AGFI = 0.917 GFI=0.946 CFI=0.952 NFI=0.923

The standardized coefficient in the Hypothesis namely service quality with a positive impact on
the perceived value of the commercial banks has a significant value ( = 0.7134; t-value= 6.1718),

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supporting the assertion that the service quality significantly and positively influences the
perceived value of the service offered by the commercial banks. This fundamental concept
reiterates that the commercial banks should focus on the quality of service to increase the
perceived value of service among the customer‟s mind. The real challenge for the commercial
banks is to find SERVQUAL dimensions and their significance to overall service quality.

The second Hypothesis is trying to predict the relationship between the perceived value of
the service by the customers to their satisfaction. This hypothesis supports and proves that the
perceived value of service plays a significant impact on the overall customer satisfaction since its
value is 0.6291 and the t-statistics of 5.2376 which is significant at one per cent level. This
direct effect would give clear relationship between perceived value and customer satisfaction.

The third hypothesis reveals the impact of customers‟ satisfaction on their loyalty. The -
value (0.5739) and the t-statistics (5.9708) are significant at two per cent level. The present study
reveals that there is a significant and positive direct impact of customers‟ satisfaction on
customers loyalty. Moreover, the results are encouraging for commercial banks as very much
satisfied customers would like to recommend this bank to others.
The fit indices for this model indicate how well the data fit with model. Infact, all fit
indices are well within the range accepted among the researchers. The significant Chi-square
value (113.08) supports the model. The comparative fit index that is Normed Fit Index (0.923)
value signifies the best of fit of model with the collected data. The variances are also greatly
explained. The Goodness of Fit Index (GFI=0.946), Adjusted Goodness of Fit Index
(AGFI=0.917) and Tucker Lewis Index (TLI= 0.934) along with Root Mean Square, Error of
Approximation (RMSEA = .052) strongly supports this model.

Direct and indirect effects on Customer loyalty

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The direct and indirect effects of service quality, perceived value and customer satisfaction
on customer loyalty are evaluated with the help of structural equation modeling. The results are
shown in Table 7.

TABLE 7
Total effects of the factors involved in evaluation of service quality on Customer Loyalty
Sl.No Factors Direct Indirect Total Relative
effects effects effect Percentage
1. Service Quality 0 0.173 0.1730 18.02
2. Perceived value 0 0.213 0.2130 22.19
3. Customer satisfaction 0.5739 0 0.5739 59.79
4. Customer Loyalty 0.5739 .3860 .9599 100.00
From table 7, customer satisfaction clearly has the high level of impact (59.79%), followed
by perceived value (22.19%) and service quality (18.02%). The customer satisfaction has a direct
impact whereas perceived value and service quality have indirect effects on the customer loyalty.

CONCLUSION AND MANAGERIAL IMPLICATIONS
The service quality scale developed in this study was first calibrated using the data from
customers of public sector banks (i.e. sample-1) and then cross-validated using a more diversified
data set (i.e-sample-2). Four service quality factors were identified as the first order dimensions
of service quality in the context of commercial banks. These are Reliability; Responsiveness;
knowledge and Recovery; and Tangibles. Notably, the variables in knowledge and recovery are
correlated together and formed as a factor namely knowledge and recovery. Subsequently, the
confirmatory factor analysis was employed to confirm the dimensionality of the first order service
quality factors. The purification process in the present study was dictated by the desire to develop
a more parsimonious as well as reliable measure of service quality that would be widely useable
to most industries falling under service sector. The result highlights the need not only to
operationally the service quality construct, but also to identify to which typology a service
belongs, because the latter fact may suggest the service quality factor. So emphasize for training
service staffs and for formulating competitive operations strategy. Based on results reported in
the present study, consequently, service providers in the commercial banks could interpret these

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results suggesting that they may downplay the role of reliability, responsiveness, knowledge and
recovery; and tangibles.
In order to achieve customer satisfaction, bank mangers need to understand what
customers want and how they assess the bank service quality. The present study compiled a list of
16 service quality variables (grouped into four factors) that an average bank customers often use
to assess bank services. Our operationalizable questionnaire items could provide several hints to
bank manager in terms of how to shape bank customer‟s experience. Concentrating on the four
identified service quality factors, the reliability and responsiveness appear to be slightly more
important than the knowledge and recovery; and Tangibles. As far the reliability dimensions are
concerned, error free records and timely provision of service need to give customers, special
attention. On the other hand, in order to enhance the responsiveness dimension, bank mangers
and staffs have to be highly responding the customers call. I terms of knowledge on recovery
dimension, knowledge of staffs is the key whereas in the case of tangibles, it is upto date
equipment. Bank managers may improve the tangibles dimension by keeping bank‟s physical
environment up to date and visually appealing. It is worth noting that improving all dimensions of
service quality sounds a good and audacious goal, but the main advantage of a distinctive
sequential improvement allows bank managers and staffs more opportunity to learn from possible
mistakes in one clinical change before a full-range service quality program is implemented.
The findings indicate that while service quality is an important driver of customer loyalty,
its indirect effect through perceived value and customer satisfaction is overwhelmingly larger
than the direct effect in generating higher customer loyalty. It is important for the bank managers
to understand the relevant service quality dimensions in their banking that could reinforce
positive customer satisfaction assessments. Bank managers need to develop a systematic
assessment programs to monitor service quality and customer satisfaction overtime. Bank staffs
should be kept informed of results and be encouraged to take part in figuring out an effective
resolution strategy. Only when a service culture is created, can the commercial bank‟s
management ensure the efficient delivery of services most desired by customers. The customers
loyalty should be generated only through customers satisfaction. So the bank managers should

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aim at customer satisfaction, then they ensure customers loyalty through the customer satisfaction
but not directly through the service quality of commercial banks.

REFERENCES

1. Alka Sharma and Versha Mehta (2004), “Service Quality perception in financial services –
A case study of banking services”, Journal of services research, 4(2), October – March,
pp.205-221.
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