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Consumer Perceptions of Non-Banking Financial Institutions

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Non-Banking Financial Institutions (NBFI) v/s Banks in India – Why NBFI are doing much business than Banks? A study of New Delhi based Upper and Middle Class Consumers.

Master of Business Administration


In the era of globalization and liberalization the development of financial sector has played and important role in the economy of India. With the services offered by banks and non-banking financial institutions (NBFI) the life of consumer in India has completely changed. Borrowing is one of the important aspects that have changed the whole scenario of Indian society.

Change in the trend of culture of upper & middle class consumers, change in the behaviour of consumer regarding borrowing and change in the norms of banks and NBFI regarding borrowing has made life of Indian consumer very comfortable.

This research shows how non-banking financial institutions are fulfilling the demand of upper & middle class consumers and how they are doing more business than banks and why consumers rely more on NBFI rather than banks in India.

This research uses questionnaires, interviews of consumers and direct sales agent of NBFI to examine the consumer borrowing and role of financial institutions.

The research concludes that consumers are relying much more on NBFI and it is not risky & difficult to borrow loan because of policies & norms regarding loans and availability of flexible financial options.




This chapter is introduction about the research topic. It highlights the aims and objectives of the research. It also tells about the structure of the dissertation and the summary of this chapter.


Each and every country has its own financial system. Financial system usually consists of financial market, financial intermediaries and financial product or service. Finance in simple words means ‘money’ but finance is a source which provides funds to a particular activity. A financial sector/system acts as an agent to make sure that funds flow from the areas of surplus to the deficit area. A financial market is a place which creates financial assets and exchange of money for goods and services. Financial market consists of foreign exchange market, capital market, credit market and money market. (Web 8)

Money is a fascinating thing which attracts human to a great extent. Over thousands of years the process of creating money and using money is making human enthusiastic. Financial intermediaries play an important role in building economy of a country. Financial Intermediaries includes banks, financial institutions, non-banking financial institutions (NBFI), investment companies, pension and mutual funds. (Web 9)

Financial sector plays an important role in organizing and properly distributing & sharing the savings. Financial sector act as a passage or tube which transfers the financial resources from net savers to net borrowers .ie. from the person who spend less as compared to their earning to those who earn less and spend more then their earning. (Web 10)

Indian financial system consists of huge network of banks and financial institutions (including non-banking financial institutions) and range of financial instruments. From the last two decades there have been great improvements in Indian Financial system and there is a huge supply of banking and other financial facilities provided to large population of India. (Web 10)

A safe and sound financial sector is required to maintain the growth of an economy. With the help of globalization and change in technology the operating environment of banks and other financial institutions has changed significantly. Due to competition and change in customer demand there is increase in product innovation and change in strategy of banks and financial institutions. In order to face the competition and meet challenges Reserve Bank of India (RBI) has also changed its regulations and provided a new framework. Reserve Bank of India (RBI) is trying to develop a strong, competitive, stable and powerful banking system so that it can help in growth and development of the economy. (Web 11)

According to Sarkar (n.d.) a strong, diverse, efficient and flexible financial system plays an important role in the economy of a country. A developed financial system maintains high level of investment and promotes growth in the economy. The financial system in India consists of financial institutions, financial market, financial instruments and services. Indian financial system is divided into two segments- organized sector and traditional sector which is also called as informal credit market. In organized sector financial services are provided to the community by large number of financial institutions which are mainly business organizations. And financial institutions that are providing specialized or provide some extra services are called as banking or non-banking units. Reserve Bank of India (RBI) is the apex institution and regulates the credit. Financial institutions include public and private commercial banks, cooperative banks, development banks, regional rural banks. Where as finance & leasing companies, LIC (Life Insurance Corporation), GIC (General Insurance Companies), provident funds, mutual funds, post office banks .etc. are non-banking financial institutions in India. (Sarkar, n.d., pp. 1)

RBI is the central bank of India and was established in April, 1935. RBI acts as Government banker, agent, adviser and also act’s as banker’s bank. RBI is the controller of the credit which means that RBI has power to change the volume of credit created by banks. (Web 12)

The profitability of banking sector is improved because of reforms set by banking system which results in high operating and net profit. With the entry of private banks there is a huge competition for public sector banks for loaning of funds. With the entry of non-banking financial institutions (NBFI) and Development financial institutions (DFI) the competition in sourcing the funds is also increased. (Chanda, 2005, pp. 31)

NBFI act as an intermediary between lender and borrower and provide better, different services than normal banks. NBFI includes investment companies, finance corporations, chit funds, hire-purchase finance companies, loan companies, leasing companies, mutual benefit funds. All of these NBFI have the ability to provide large amount of financial services to wide range of customers from small borrowers to established companies. (Chanda, 2005, pp. 36)

Indian consumers are changing their habits at a fast rate and they are borrowing money to buy the product they wanted. Because of easy financing options they don’t have to think if they can afford a product or not. Consumer finance is a win-win situation for every one and now they don’t have to wait for years to save their money and upgrade their living standards. (Agarwal and Mittal, 2004, pp. 6)

The Buy Now Pay Later culture is very much common in India now a days. Consumers are loosing their fear of borrowing. Even if a consumer wants to buy a home, home loan financing is easily available. Falling interest rates, increasing loan duration and reduced monthly installments are making all these things possible for consumers. (Agarwal and Mittal, pp. 6-8)

The banking sector is one of the most important sectors in Indian financial sector. Over 80 percent of funds which flow in the financial sector are because of banking sector. (Sarkar, n.d., pp. 1). NBFI are entering in the financial sector because of inflexibility of banks and their less competition amongst them. Kotak Mahindra, Citi Financial, Ashok Leyland Finance, Sundaram Finance .etc. are the big players in this field and are growing rapidly at faster rate and are taking good position in financial sector. In respect to all these things, the purpose of this study is to find why these institutions are doing better business than public and private banks in India.


This research is planned to understand and examine the trend of upper class and middle class Indian consumers in taking loans and their reliance on banks and non-banking financial institutions, particularly in today’s competitive environment. This research is done to achieve the following defined objectives:

  • To compare and contrast the role of banks and non-banking financial institutions (NBFI) in India economy.
  • To evaluate the role of both banks and NBFI for borrowing in Indian developing economy.
  • To understand and examine the banking and financial sector regulations in India in post liberalization period.
  • To evaluate and analyze the emerging consumer culture in India.
  • To understand and examine the trend of upper and middle class Indian consumers in taking loans.
  • To examine the policies of banks /non-banking financial institutions regarding offering loans to consumers.
  • To identify how NBFI are fulfilling the aspirations of upper and middle class in India.


There are 5 chapters in this dissertation.

Chapter 1: Introduction

This chapter introduces the research topic. It outlines the aims and objectives of dissertation, overview, structure of dissertation and finally summary of the chapter.

Chapter 2: Literature Review

This chapter talks about the literature review. Discussion of available literature related to the topic is done. The aim of this chapter is brief about various concepts on which this dissertation is based. The literature is available from various books, online journal articles and websites.

Chapter 3: Research Methodology

This chapter discusses about various research methods and data collection methods. It discuss about research design, quantitative research, qualitative research, advantages & disadvantages of various methods, limitations, validity & reliability.

Chapter 4: Findings, Analysis and Discussions

This chapter analyses all the data collected using different data collection methods. All the data is critically analyzed and discussions are made on the basis of literature which is related to the objectives of research. Data presentation is done using various methods like tables, graphs, charts and pie charts .etc.

Chapter 5: Conclusion and Recommendations

This chapter concludes the research by providing a conclusion on the basis of findings, analysis and discussions. This chapter also discusses the limitations faced during research and recommendations for future research.


This chapter was an introductory chapter aimed to give reader a brief idea of what this research is all about. It highlights introduction, aims, objectives and finally structure of the dissertation.




Aim of this chapter is to discuss the literature related to the research topic. This chapter discusses about financial institutions regulations in India, culture of upper & middle class consumers in India and worldwide, what makes consumer to borrow and strategies & policies of financial institutions regarding credit.


2.2.1 Financial Institution Regulations Globally

The Changing scenario of banking sector around the world, in the light of globalization has significantly drawn the attention of researchers and practitioners. They have raised important issues regarding corporate governance regulation and banking institutions as corporate governance is related to banking regulations. In this context the research of Alexander (2004) titled Corporate Governance and Banking Regulations requires worth mentioning here.

The research of Alexander (2004) addresses the issues of corporate governance and banking institutions. Alexander (2004) begins by analyzing the upcoming international rule of bank corporate governance. Alexander (2004) provides a framework for how bank supervisor and bank management should act together in relation to the management of banking institutions and its impact on financial stability. Further, Alexander (2004) has analyzed corporate governance and banking regulation in UK and USA. Alexander (2004) concludes Financial Services and Market Act 2000 has authorized FSA (Financial Services Authority) to fill in the gaps to enhance corporate governance because traditionally UK corporate governance was not focused on special role of banks and financial institutions. (Alexander, 2004, pp. 1-2)

In USA, the federal and state statute & regulations regulates the corporate governance for banking institutions. In order to manage the responsibilities of senior management and directors a framework is provided by federal regulation. There is governance problem in banks and financial companies in US. In order to provide financial stability institutions and banks, the bank regulator must establish governance standard in regards to national banking law. (Alexander, 2004, pp. 1-2, 37)

In this era of globalization, banking and financial industry is greatly affected by major changes and it results in increased competition, less profit margin, pressure to cut the price, products having short life cycle. (Alexander, 2004, pp. 1-2, 37)

However, when it comes to comparison of financial regulations in UK and USA, it is revealed that regulation of financial system in UK is not exact as it is in USA. Evidently in USA the Securities and Exchange Commission has wide ranging regulations, and is stated as too much. Further, it is also stated that formal and strict USA rules & procedures do not allow desired flexibility and pace. However, interestingly so far new system in UK provides settlement between the self regulation and statutory regulation to make sure that financial market works in proficient and systematic way. (Web 1)

Apart from UK and USA, the regulations of financial market are changing constantly all around the world. For .eg. In Europe the membership of EU changed the main concerns of government while facing the problem of changing or executing the regulation of financial system and it is revealed that issue was the assistance from the jurisdiction. Quinn (1992) says that “harmonisation of banking rules in the EU, the co-ordination of countries own regulatory standards and centralisation of an EU integrated financial market are needed to enable swift reaction to any future market failure”. (Web 1)

2.2.2 Financial Institution Regulations in India

Financial system in India consists of specialized and non specialized financial institutions which further involves organized and unorganized financial market and deals in financial instruments & services and it helps in transferring funds. In finance money is exchanged with a promise to pay back in future. Narayanan (2005) says that in product market a buyer can easily find if a product purchased by him is defective but it is difficult to find the defects when a loan is taken. (Narayanan, 2005, pp. 1-2)

If we compare Banks and Non-banking Financial Institutions (NBFI) with non financial industries, both banks and NBFI can change or remove the risk factor of their assets more quickly than non financial industries and also banks can easily give loans to clients without taking into consideration the previous debt problems. Financial market easily allocates the resources efficiently and effectively. The financial market face the problem that it is controlled by others because some persons have some information that other does not have. In order to solve this problem there is requirement of corporate governance so that it can be assured that supplier of finance get their return on investment. (Narayanan, 2005, pp. 1-2)

India has a strong financial system. After India got freedom it inherited a diverse setup in regards to institution and market. The purpose was to mobilize savings and to increase investment rate. (RBI, 2003, pp. 3)

Financial reforms were introduced in 1991 because India faced the crisis of balance of payment in 1991 so several reforms were introduced to come out of the crisis. India faced this problem because it was heavily dependent on the public sector and industrialization strategy and both of them were not able to deliver the growth in competitive environment. Later in 1980’s India tried to expand the role of privatization and reduced the direct tax but it didn’t helped. Later the reforms were introduced in June 1991 to recover from the crisis of balance of payment. (RBI, 2003, pp. 9)

After the end of crisis Indian banking system made a considerable progress functionally and geographically. New bank facilities were introduced and the pattern of lending was changed. The feature of reform was ‘gradualism’ because it enhanced micro stability and the same time encouraged micro economic linkages. (RBI, 2003, pp. 5-8)

Currently the institutional composition of financial system in India is illustrated as three constituents: banks either domestic or foreign, owned by RBI, government or private and regulated by RBI; Financial & refinancing institutions set up under a separate law or under companies act and owned by RBI; Non-banking financial companies/institutions owned privately and regulated by RBI. (Reddy, 2002, pp. 4)

On the development of banking and financial sector reforms in India Reddy (2002) comments that reforms have changed the form of organization’s, ownership model, domain of financial institution operations in terms of assets and liabilities. Less availability of low cost fund has resulted in increasing competition for resources for both banks and financial institutions and further with the entry of banks in field of lending and financial institutions are making an attempt to pay out the short term funds has resulted in increased competition. (Reddy, 2002, pp. 4-5)

Finally Reddy (2002) says that the aim of financial sector reforms in India to set formal & semi formal measures which aim to strength the banking system as well as providing safety and reliability with the means of superior transparency, responsibility, answerability and public trustworthiness. (Reddy, 2002, pp. 6-7)

However on the other end Patel (2004) argues that in spite of the establishment of market reforms in India since early nineties the government concerns in the financial sector is not lessened in correspondence to its exit from other feature of economic activity and therefore it is too large to justify the presence on the basis of involving systematic risk. Patel (2004) further puts that during early years of India’s development there might have been some good reasons for ownership of government in intermediaries but now it is causing some damages. (Patel, 2004, pp. 5-6, 28-29)

Now India has proper intermediaries and very well commercially oriented. According to Patel (2004) “A combination of directing resources of intermediaries in fulfilling a quasi-fiscal role for government, extra-commercial accountability structures and regulatory forbearance (arising out of an implicit overarching guarantee umbrella) has mitigated the essential corrective effect of market discipline in both lending and deposit decisions. Coupled with persisting government involvement in intermediation and an implicit support scaffold, this has resulted in an aggravation of the problems of moral hazard that is a normal feature of financial systems.” (Patel, 2004, pp. 29)

Commenting on the government role in liberalized economy Echeverri-Gent (2001) says that reducing state economic interference does not lessen the importance of state in economic development. And in addition to its role of maintaining stability in economy the state continue to play small but more important role to design and modify the activities of economy by creating incentives. There are different ways that are used by state in order to create the incentives; it involves authorization of property right, market microstructure which involves matching the investors demand with the price and volume in effective and efficient manner. (Echeverri-Gent, 2001, pp.1) (Giridhar, n.d., pp. 1-3)

Echeverri-Gent (2001) also states that incentives created and recreated by state using political process are present in part of economic result. And politics explain efficiency and fair behavior in market are promoted by which state institution. (Echeverri-Gent, 2001, pp. 1)

In relation to the above fact Ramesha (2003) finds that currently in India there is a dual control for credit cooperative and banks. The state government looks after and regulated all the issue related to administration where as Central Bank of India (CBI) supervises and regulates the banking operations. As a result there is some conflict in taking legal decisions between state government and central banks of India. Ramesha (2003) argues that it is not possible to separate the financial & administrative areas for regulations and even if it is possible it acts as an obstacle in the effective supervision and control. (Ramesha, 2003, pp. 10-11)

Further according to Ramesha (2003) central bank has power under Banking Regulation Act to keep money for specific purpose and to handle vital aspects related to the performance of commercial banks. There is need of Registrar of Cooperative Societies to get involved in the function and difficulties of cooperative banks. The central bank is not in a position to supervise credit cooperatives and banks. Therefore dual control affects the function of urban cooperative banking sector, supervision & regulation quality. Therefore Ramesha (2003) finds that beneath this rule of duality of control the urban cooperative banks might result in neither cooperative nor commercial bank. (Ramesha, 2003, pp. 10-11)

According to Chakrabarti (2006) the fundamental role of legal reforms in maintaining the growth of economy and financial progress is strongly voted and accepted in India. Where as it is difficult to find what basics of legal system have an effect on financial system and how. Reviewing the literature on law & finance and evaluating the India’s legal & judicial system it seems that excellent protection is provided to the investor’s right. (Chakrabarti, 2006, pp. 12, 15-20)

According to Porta et al there is best protection provided to the creditor in India by Indian legal system in contrast to creditor rights. (1998 in Chakrabarti, 2006, pp. 13)

But execution of these laws is below to the satisfactory level. Further it is found that law which deals with public enforcement of securities is weak and courts in India are very slow and has loads of ongoing cases. India is still fighting with the problem of red-tapism and bureaucracy which are obstacles for business and foreign investment in India. Chakrabarti (2006) says that Indian small & medium sector rely on informal network and institution on the basis of trust and reputation for financing rather than counting on legal system to issue contracts and settle disputes. (Chakrabarti, 2006, pp. 23)

Finally, Rajan and Shah (2003) says that there is problem in the regulations of banks, insurance companies and non financial institutions. There are a lot of problems related to the government guarantees, public sector ownership, processing of information & risk taking. Therefore according to Rajan and Shah (2003) there is requirement to solve all these problems by obtaining good regulatory system, and obtaining world class regulations. Thus Rajan and Shah (2003) suggests that dealing with these problems will provide information processing system, reducing the fiscal problem, increasing the flow of risk capital in the system. (Rajan and Shah, 2005, pp. 46)


The word culture has several meanings, in Latin it means “tilling of the soil” whereas in most western language culture means “civilization” or “refinement of mind”. In simple words culture means way of life, art, behavior and beliefs. (Hofstede and Hofstede, 2005, pp. 2-4).

According to Mooij (2004) culture is glue which joins groups together, without culture design it will be difficult for people to live together. It’s only the culture which defines a human community, its individuals and social organizations. (Mooij, 2004, pp. 26)

Where as according to Kluckhhohn “Culture consist in patterned way of thinking, feeling and reacting, acquired and transmitted mainly by symbols, constituting the distinctive achievement of human groups, including their embodiments in artifacts; the essential core of culture consists of traditional ideas and especially their attached values” (1951, pg 86 in Hofstede, 2001, pp. 9)

Each and every individual is a product of its culture and its social group therefore they have to act in certain manner to live in their social cultural environment. Culture cannot be separated from an individual neither culture can be separated from historical events/situations. (Mooij, 2004, pp. 26)

Culture is found in local street, in your city, state, and country. Small children, youngsters, adults, older people have their own culture and most of the times share the culture as well. According to Williams culture is a way of life, people, group or humanity. Culture is not something we absorb- it is something that is learned. (1983b:90 in Baldwin et al, 1999, pp. 4-7)

Culture includes shared beliefs, attitudes, norms, roles and values. These elements are basically transferred from generation to generation. Culture includes values, rituals, heroes, symbols. Values are basically feeling of a person having plus and minus side. It deals with evil v/s good, dirty v/s clean, ugly v/s beautiful .etc. values are acquired by a person at very early age in their lives. Values are visible until they become evident in behavior. In contrast to values, rituals are related to social acts, ceremony or something related to religion. Rituals are carried out by an individual for their own sake and usually involve paying respect to other & ways of greetings. Heroes are persons alive or dead, real or imaginary whose characteristics are highly appreciated in culture and most of the times serves as a model for behaviors. For eg. Mahatma Gandhi in India or Bill Gates in USA. Symbols are words, gestures, pictures or objects that carry a particular meaning and are recognized by only those people who share a particular culture. It involves national flag or any particular dress or hair style .etc. (Hofstede and Hofstede, 2005, pp. 6-8) (Hofstede, 2001, pp. 9-11)

The culture of people around the world is demonstrated in wealth & celebrity and this is particularly true about people in western countries. According to Schor (1998) “Instead of emulating folks with a similar income, people are taking their consumption cues from television characters, relatives, friends and co-workers whose income often far exceeds their own”. Commenting on this trend Schor (1998) states that this can get expensive because it seems that their culture worship wealth and celebrity. (Web 14)

There are 3 layers of culture. The outer layer consists of explicit culture and it involves language, food, houses, monuments, market, fashion and art. These are the symbol of deeper level of culture. Middle layer consists of norms and values. Norms is basically sense of what is right and what is wrong. Norms can be written laws or social control where as values determine what is good and what is bad. Values help in making choice from existing alternatives. And the third core layer is assumptions about existence which is related to the ways that deal with the environment with the available resources. (Trompenaars and Hampden-Turner, 2005, pp. 20-24)

Hofstede and Hofstede (2005) has divided cultural layer as national level, gender level, generation level, social class level and regional/ethical level. National level is related to ones country or the country where a person belongs and with nation they have their culture, community. Gender difference is basically based on gender .ie. male or female. In some societies the culture of male is different from female. For eg. Women are not suitable for some particular jobs which are meant for men only. Generation level is separating grandparents, parents and children. For eg. Younger generation has no respect for the values of elders. Social class level is associated with individual’s profession and education because education and profession are the powerful sources of cultural learning. Regional level is based on person’s region and religion. (Hofstede and Hofstede, 2005, pp. 11-12)

Today consumers are very much concerned with their identity, ego or superego which totally depends on their culture and most of the times related to the luxuries of life. Human needs are totally related to the culture. Needs like Psychological, safety, self actualization and esteem needs are very much important for consumers of each class. Consumers feel more powerful if they have symbols of power or prestige possessions. For e.g. Prestige possession for consumer is luxury car, big house, frequent travel abroad/holidays abroad. Clothes satisfy functional need but fashion satisfies social need. The behavior of consumer is not only determined by their needs but also by their surroundings. Consumers in same culture can do different things for different reasons. Ownership of luxury items shows the status symbol where ownership of cheap watches show low income of person. (Mooij, 2004, pp. 136-140)

2.3.1 Culture of Consumers Globally

Schor (1998) also comments that how you save and spend totally depends on the reference that you choose and it rules the culture of upper and middle class, particularly in western culture of world. In order to make his observation solid Schor (1998) presents example of Americans, where he shows his concerns regarding consumerism. Schor (1998) states that Americans are spending and consuming as if there is no tomorrow, and the worst part is that they are not paying cash for it. Consequently, Schor (1998) cites that debt of personal credit card has doubled in last four years. The bankruptcy has reached on to the highest point and people are trading financial security for short term satisfaction. (Web 14)

Schor (1998) also points out that the assets of an American family is $10000 and savings have fall down very quickly in last 10 years. In other words the western culture today commanded by influencing consumers, which forces the people to believe in wealth creation & celebration and in result it leads to the tendency of high borrowing. (Web 14)

Consumer research has given some evidence that within each social class, there are some specific lifestyle factors which involves beliefs, attitudes, activities and behavior. And all these factors help in distinguishing between the members of one class from other class. There are usually three main classes upper class, middle class and lower class. (Schiffman and Kanuk, 2000, pp. 307)

A product can also express the value of consumer. For e.g. A house is not only to live but it tells something about the owner as well. Different towards food is also a part of the culture. Some people buy food from small shops where as some buys from expensive supermarket. Product usage and ownership also determines cultural values. (Mooij, 2004, pp. 233-236)

In India the position of consumer in society is defined by the clothes they wear, the shoes, the accessories .etc. and all these things determines the class and power of a particular person. People do not wear in public what they wear in private, but in USA even President goes for jogging in shorts and baseball caps. All this is because of cultural difference. (Mooij, 2004, pp. 170)

Consumer attitude towards Financial Services has changed and this is because of change in Life Style. Demand of own home, TV, washing machine, air conditioner, car, holiday abroad in UK/US/Europe is increasing. Because of inflation consumers are borrow and buy now rather than save to buy things later. Expectations of consumers have increased. Better living standard, improved life style, better quality life, rising income all these have had an effect on the services provided by financial institutions. (Crosbie, 1990, pp. 4-6)

2.3.2 Culture of Consumers in India

The changing socio-economic structure of India in the light of globalization and liberalization is highlighted by Breyer (1998). According to Breyer (1998) earlier most of the banks, airlines, utilities, TV & radio channels were owned by government. And more importantly high tariffs, rupee inconvertibility, corruption, high taxes which kept multinationals & foreign investors away from India. But now the whole scenario is been changed, there are privately owned airlines, phone companies, private TV & radio channels, multinational companies are coming to India & investing their money in India. Today, there are more choices, more jobs, more facilities, and more money flowing into the country & into the pockets of skilled and educated upper & middle class consumers. And such people are identified as Engineers, S/W Developers, Chartered Accountants, Airline Cabin crew, and Stockbrokers .etc. (Web 15)

Commenting on the changing culture of Indian upper and middle class Breyer (1998) says that earlier it was difficult to find Nike, Armani, Calvin Klein, McDonalds, iPod, Playstation but today all these big brands are having their outlet in major cities of India. Upper and middle class can shop at malls, supermarket, watch cable TV and even children play with imported toys, computer and video games. Finally Breyer (1998) concludes that India appears to be becoming more western so far as upper and middle class people in country are concerned. (Web 15)

Fernandes (2000) says that what ever is the fundamental social structure of the country but the fact cannot be denied that in post globalization and liberalization period Indian social and economic structure has experienced and extremely important change. As in words of Fernandes (2000) “The policies of economic liberalization, started in the 1990s and have been accompanied by a set of public discourses that have increasingly begun to debate the character of the Indian middle class”. However the supporters of economic liberalization represent the middle class as a market which should attract multinational companies. More importantly the perfect image of urban middle class in media is of rich and wealthy people, who have achieved the ability to determine the choice through consumption. Finally it comes out the contrasting views and on other hand sometimes the critics of liberalization point out the effect of consumerism and punish the middle class and criticizes the excess of consumerism. Finally, it comes out that both the views are opposite to each other and public writing in India produces the image of urban middle class as beneficiary of economic reform. (Web 16)

According to Vajpeyi (2001) Indian has taken long steps in development of economy. Middle class of India is known to be the largest market in the world and with the entry of global players into the consumer market has completely changed the whole scenario of Indian consumers. With the increasing disposable income, over consumption and lack of respect for environment has affected the society. Middle class consumers have become gadget savvy, car sales are very much high. Attitude of consumers towards consumption and spending has changed. (Vajpeyi, 2001, pp. 8, 9)

Deshpande (2005) states that in India the social status always had a strong component. A person’s absolute position counts little, and it is only the social distance that separates people from others. Deshpande (2005) concludes that all these issues are occurring in a fundamentally changed social, economic and political situation. The theory or principles which served to reduce the nationalism, development or socialism conflict are not proficient to execute their soothing and peaceful role. However at the same time Deshpande (2005) also finds that the opponents themselves are new groups which are produced by unknown globalized procedures. (Deshpande, 2005, pp. 1-2)

As lower middle class is concerned the view of world & experience of low middle class at one instance they dislike globalization & liberalization and at other instance they want India to move forward and compete in a globalized world. Sridharan has written “The post-1991 liberalisation, however, has been sustained, even if the pace of change has been slower than many advocates of reform might have liked. Indeed, unlike many other countries that have undertaken programs of economic liberalisation, India has introduced reform very. This has had the contradictory effect of leading to a support base for liberalisation while at the same the sheer weight of public employees and publicly subsidized agriculturists in this economic category have served to constrain the progress of certain types of economic reforms” (2004, pp 424-5 in Scrase, 2006, pp. 15-16)

Finally, Scrase (2006) concludes that the tendency to participate in the global development, the upper and middle class people in India are enthusiastically supporting globalisation and liberalization initiatives taken by the government. As a result, like other part of the world, the culture of consumerism is also establishing its feet in India and the rich/wealthy people in the country (upper and middle class) are taking the shelter of borrowing in order to feed their increasing hunger of consumerism. (Scrase, 2006, pp. 16)


In the previous section, it can easily be understood that a new kind of culture has developed all around the world (including India) in the light of globalization and liberalization. This culture can be called as culture of consumerism, where people in centre are upper and middle class who believe in wealth creation and celebration. This culture of consumerism has forced people to rely on credit which results in various issues of concern. As based on observation and study Holt and Rupcic (2005) argues that now a days consumers are very much dependent on credit and most of consumers misunderstand various terms like zero interest loan, interest only credit product, flexible financing options which results in mismanaging their finance. (Holt and Rupcic, 2005, pp. 1, 5)

Previously there were a lot of problems associated with financing options but with the development of reforms more innovative options are available. Because of these developments household also are expecting the same flexible options which was previously available to corporate and government. Such development are identified by Holt and Rupcic (2005) as “an overall decline in inflation expectations that changes how people borrow by extending their planning horizons; increased financial innovation by the financial sector leading to a host of new products for increasingly sophisticated consumers; and fundamental changes in the nature of the workforce that require more payments flexibility”. (Holt and Rupcic, 2005, pp. 1, 5)

While studying consumer behavior regarding credit Malbon (1999) finds that the behavior of majority of consumer when making decision about purchasing on credit is same, taking into consideration their income, gender or the area/city they live in. However, Malbon (1999) finds that there are some differences in the behavior of consumers with different income groups. Some time low income consumers take what is been offered to them without any question because they believe that they will not be getting any other offer. Finally, Malbon (1999) finds that low income consumers are mainly concerned with the interest rates where as middle or high income are concerned with ease or difficulties in getting loan. (Malbon, 1999, pp. 10-11)

In the above context Park and Rodrigues (2000) uses the US data from 1959-1994 and examined the compatibility of Permanent Income/Life cycle hypothesis (PI/LCH) and future power of consumer borrowing. “The PI/LCH implies that consumer borrowing should be an increasing function of the gap between permanent and current income. In addition, if consumers accurately estimate permanent income, large borrowing should be associated with rapid income growth in the future. Our empirical results support the PI/LCH; consumer borrowing increases with the estimate of permanent income and decreases with current income”. Apart from this Park and Rodrigues (2000) finds that consumer borrowing has marginal predictive power. (Web 3)

In a more significant research Martins and Villanueva (2006) studied the impact of reform on consumer borrowing. The main parameter which determines household borrowing is interest rate and it also helps in promoting savings. It determines if a low or middle income consumer is provided subsidized rate on mortgage the how it will affect the household borrowing. There assumptions were based on financing a house with the program. Firstly they determined the borrowing behavior of high class consumer should be affected by reform and estimate the elasticity of probability of getting the loan at that rate lie between -2.8 and -1.3. Secondly, they “document that after the reform, the distribution of loan sizes became more concentrated at the discontinuity point of the budget constraint of eligible individuals”. As a result both of their findings agree that increase interest rate results in negative response with respect to household borrowing. (Web 4)

Dutta and Magableh (2004) examine the socio-economic factors that influence the behavior of borrowers and lenders. They determined the four stages of borrowing process. The people in first stage apply for very small loan from microfinance provider and this includes people who are single owner of small business, head of family, who knows large number of micro finance providers, those in age group 18-24 or 35-44. People who less likely apply to micro credit includes male owner of small business, person doing full time job, who is having large savings, those who don’t want to pay high application cost, having strong religious belief, who are in age group 45-54. Person having large amount of assets, who already have big amount of loan, who operates in agriculture sector, higher formal educated person, head of family are those who take large amount of micro credit. And those who have their own place of residence will demand small micro credit. Person likely to apply for micro credit and demand large loan involves single applicants, head of family, having more collateral, who have social responsibilities. (Dutta and Magableh, 2004, pp. 9, 12)

Noticeably, the result of research of Dutta and Magableh (2004) says that non-economic factors like religious beliefs, social events and social responsibilities plays an important role in borrowing especially from the demand side. (Dutta and Magableh, 2004, pp. 2)

Further Doms et al (2007) says that there is very little access of credit to the poor. The reason behind this is the banks are not sure which borrower can pay the credit back. Also no body knows about credit bureaus and if consumers know what is credit bureau then most likely they don’t want their report to be affected otherwise there will be problem in future borrowing. They also find that the borrowers who are educated and know about credit bureaus are most likely to pay their loan back as compared to less educated borrower. (Web 5)

Worthington (2006) determines what contributes to the financial stress in Australia. In Australian household demographic, socio-economic and debt portfolio contributes financial stress. Financial stress here is related to financial reasons where consumer is not able to have a holiday, not able to involve in leisure activities or not able to have dinner out with friends and relatives. Worthington (2006) examined various characteristics like age, gender, household income, debt repayment, marital status, ethnic background and Worthington (2006) has used Binary logit model to determine the factors which are associated with financial stress. Worthington (2006) concludes that families with more children, from ethnic background and who rely on government benefits have high financial stress whereas families having high disposable income and high housing value have less financial stress. (Web 6)

In another important research Atieno (2001) finds that if a consumer is having higher wealth it does not means that they don’t need credit, there might be reason that the type of loan they require does not exist. It might be because the credit gap which is there is too big for informal market and not served by formal market. There is limited allocation of loan in informal market where as in formal market there is huge availability, but it depends on terms and conditions provided. Informal credit sources are easily accessible for small borrowers and the main reason behind this is lending terms and conditions. However, different borrowers have different needs and it also depends on the availability of credit. (Atieno, 2001, pp. 37-38)

Choudhury (2005) says that the financial maturity and confidence of Indian consumer is increasing. According to RBI, in 2002 consumer borrowing in India was 2 percent of their total household income. Where as in Singapore it was 176 percent of household wealth, 75 percent in Malaysia and 39 percent in Thailand. (Choudhury, 2005, pp. 18)

Commenting on the recent development in India, Jairaj (n.d.) says that in last 10-15 years the consumer credit in India has reached new heights and structure is changed completely. He also adds “From a demand-oriented and taboo-ridden sector to a large supply-driven corporate set up, there has been a paradigm shift in this sector, rooted largely in the new economic policy of liberalization, globalization and privatization adopted by India in the early 1990’s”. And with the entry of new players the whole industry has been changed in regards to consumer protection and regulatory norms. (Jairaj, n.d., pp. 1)

So far as consumer borrowing trend is concerned, Indians tend to buy two or four wheelers, mobile phones and consumer durables with confidence and style. With the rise in consumerism, attractive marketing by banks, increasing acceptance and use of plastic money has changed the whole scenario. Buying goods by borrowing is common now days. The credit card movement is year 2006 increased from 16 million to 20 million. (Web 7)

Nayak (2005) says that people in rural India are borrowing faster than their savings and according to the latest figures loans given by the banks in rural India are exceeding the amount of deposits in those areas. Percentage of home loan and personal loan is increasing where as agri-loan is declining. (Web 13)

According to Nayak (2005) bankers believe that most of the loans are taken to meet expenses like wedding in family, education loan, purchase of asset or to pay off earlier loan taken from local money lenders. In rural areas most of the times it is difficult for the banks to determine whether to issue loans or not because earning of rural borrowers is dependent on agriculture & other dependent activities where as in case of urban area borrowers, it is basically dependent on income of salaried people or businessman. (Web 13)


The continuing transformation in the banking industry has fetched a new notice in regards to the role that bank plays in the monetary transmission process. To a degree borrower rely on bank credit and bank lending is bounded by monetary policy and few limitation might affect the economy with the help of a bank credit channel. In the environment of restrictive monetary policy banks managed to issue liabilities and maintain their business of lending. (Morris and Sellon, 1995, pp. 59-61)

Since a direct bank channel does not emerge to be a part of monetary transmission process so the changes in the banking system may affect the transmission process. Furthermore because of changes in bank lending the economy of country may get effected and could force borrowers to change their spending decisions. (Morris and Sellon, pp. 63, 71-73)

Today, to weigh up the loan application banks are making more and more use of credit scoring models. The purpose of credit scoring models is to reduce the default rate and to minimize the wrongly organized loan and to minimize the number of loans that are classified as defaulted or not defaulted. Thus they fall short to take into account that loans are contract for a specific period for which it is vital for banks to know if but also when a loan will failure to pay. (Roszbach, 2003, pp. 1, 5, 22)

In order to evaluate the return on a loan, a Tobit model is used. This model predicts the expected survival time on a loan to any kind of applicant. It estimates the decision to provide a loan or not and also determines survival time on a loan to any capable applicant. The purpose of this model is to separate short survival time applicants and long survival time applicants. The bank loan providing procedure is revealed to be incompetent because the loans they are getting conflicts with the risk minimization and survival time maximization. So, there is no compromise between high default risk and high return in lending policy. (Roszbach, 2003, pp. 1, 5, 22)

Banks are not allowed to fix the terms of loan offered but it is believed that banks tie their credit terms to use underwriting services. In order to gain market share in underwriting debt, the banks are offering some concession and discounted rates to their customers. Banks provide credit service to a business, with the term that business will use banks underwriting and if customer fails to provide sufficient investment then the banks may not renew credit or change the terms. But there is no evidence that the loan terms are better for borrower who have used it or who will be using it in future. (Fraser et al, 2003 pp. 1-3, 19)

Where as Miriam et al (2006) states that in order to make decision for current credit policy the bank uses their past experience and backward looking technique to determine the effect of financial fragility in the period that were headed by the boom in the economy. Further they put that backward looking process can bring a bias into the credit policy of banks. As a result during the period of economic growth banks promote over investment issue, easy terms to extend credit. And when the economy is down banks lend money only to high quality borrowers as it is difficult for the entrepreneurs to obtain credit. Therefore “This pro-cyclical credit-policy therefore serves as another sub-channel of the credit-channel in accentuating business cycles fluctuations”. (Miriam, 2006, et al pp. 1-2, 14, 23)

Bernanke (2007) states that Banks are playing vital role in providing credit to the consumer and business with in comparison with other financial players. Bernanke (2007) says “Banks do continue to play a central role in credit markets; in particular, because of the burgeoning market for loan sales, banks originate considerably more loans than they keep on their books”. He further adds that “Nevertheless, non-bank lenders have become increasingly important in many credit markets, and relatively few borrowers are restricted to banks as sources of credit” Bernanke (2007) concludes that increasing number of credit providers and their impact on monetary policy requires further research because the increase of non banks lenders are effecting the strategy of banks. (Web 2)


This chapter dealt with the important literature which is required for this research. It talked about regulations of financial institutions in India, how culture affects society, why consumer borrow & what makes them borrow and lastly it discusses the policies & strategies adapted by banks and non-banking financial institutions in regards to issuing loans and providing finance to the consumers.





This chapter describes the methodologies involved in research project. It tells about research design and data collection methods including quantitative method & qualitative method, advantages & disadvantages of research methods, validity & reliability of research methods.


Methodology is a combination of various tools and techniques which are used in the research. These tools and techniques involve research method, data collection method and data analysis. There are a lot of research methods provided by different researchers, but in this research the researcher has used data collection and data analysis methods to collect and analyze the data. There are two types of research methods: - Quantitative method and Qualitative method. This chapter tells about how these methods are used, importance of each method, Research Design, Research Method, Reliability & Validity and Limitations.


A Research design is a logical plan for getting from here to there, where here may be defined as the initial set of questions to be answered and there is some set of conclusions or answers about these questions” (Yin, 2003, pp. 21). Research design is a frame work or master plan that helps in determining the methods and procedures for collecting and analyzing the information. The purpose of research design is to determine the information collected is appropriate for solving the problem and study is done according to the procedures. It links the data to be collected and conclusions to be drawn. (Zikmund, 2000, pp. 65). According to Philliber, Schwab and Samsloss a good research involves what is the question that needs to be studied, which data is useful and how to analyze the data and find results. (1980 in Yin, 2003, pp. 21). Basically research design is a plan or strategy which helps in determining what to do, how to do and when to do. The purpose of this research is to understand and examining the trend of upper and middle class Indian consumers regarding taking loans and their reliance on banks and non-banking financial institutions.


Quantitative method provides useful data that can be analyzed and interpreted to aid a decision making process, to reach measured conclusions and predict future outcomes. (Saunders et al, 2003, pp. 327). Quantitative method is used when we need some figures to strengthen our arguments made of qualitative grounds. (Morris, 2003). As all research involves some type of numerical data that can be used to answer the research question & meet the objectives and that data is called qualitative data. Qualitative data is used to analyze & interpret the things which are in numbers (Saunders et al, 2003, pp. 327). Quantitative method usually involves statistical analysis and it is based on numerical evidence to find conclusion or to test hypotheses. If we want to be sure about the reliability of the results, then it is always necessary to study a large number of people in that research area and the data can be derived from questionnaire survey, observations or from secondary sources (Ticehurst and Veal, 2000, pp. 20).

Yin explains “numerical data provides quantitative information, while non numerical data furnishes information that is clearly of qualitative nature” (1989:88 in Thietart et al, 2001, pp. 78)

Quantitative research not only involves questionnaire, survey, results of questionnaire but if it is a company it can also involves annual financial returns or absenteeism rate that can be used in collaboration with survey data. It always involves numerical analysis of data and this can be as simple as producing histograms. Quantitative, descriptive & comparative and prescriptive are three main type of Quantitative research. In descriptive research there is no comparison between groups as it is a simple description of some phenomena facilitated by using numbers. Descriptive research can be as simple and straight as histograms, pie charts, bar graphs or reports. Where as comparative research involves the comparison of data between two or more groups statistically. There is an independent variable - that we compare and independent variable – what is measured. And similarly prescriptive research is related to some predictions like what are causes & what will be the effect. Prescriptive research can be simple or complex. (Partington, 2002, pp. 101).

This research is basically based on Quantitative analysis because the main focus group is customers and to find about their behavior regarding borrowing, why they borrow, what makes them borrow and why they rely much on Non-banking Financial Institutions rather than Banks.

3.4.1 Questionnaire

The purpose of questionnaire method is to find the variable & range of possible answers, where every question or part of that question represents a variable. (Clark et al, 1998, pp. 98). Questionnaire method is usually used to collect primary data. The data which is collected by a person who will use it or he/she is responsible for supervising and organizing the collection is called as Primary data. Primary data is collected only for the purpose for which it is to be used. (Wisniewski and Stead, 1996, pp. 7). Primary data is collected and used specifically for the project in hand. The method used is survey that is defines as the technique where the researcher collects data from a sample of individuals using a questionnaire method and important feature is that each respondent answers the same set of questions prepared in advance. (Saunders et al, 2003, pp. 280-283). There are basically two types of questions. One is open ended & other is close ended. Close ended questions always restricts the answers to a small set of response and the questionnaire designer must have a good knowledge of the options available in that particular subject area and however generates exact answers. Whereas open ended questions does not impose any restrictions but it is hard to aggregate the final outcome. It has the advantage of offering wide and rich responses. (Clark et al, 1998, pp. 94)

In open ended question there is no limit of an answer to either yes or no, or to a specific range of options. The advantage of open ended is “it does not threaten to bias the findings by imposing a frame of reference, effectively limiting the way the participant may answer”. And disadvantage is that it will be difficult for researcher to analyze the details in end. Where as close ended questions impose the answer to a respondent & forces to choose from the alternatives given. And it can be of multiple choices. (Marshall, 1997, pp. 39)

As this research required straight forward information therefore the questionnaire designed was structured with multiple options and close ended questions. Close ended questions are easy to respond and analyze as well. Questionnaire contained 12 questions which were totally based on the theme of this research.

According to Partington (2002) quantitative research gives the answer to the questions that are asked and if any important question is omitted from the survey then it is difficult to know effects it would have had. It requires that researcher asks the right questions and must know what the right questions are. (Partington, 2002, pp. 102).

Quantitative data can be divided into two different groups: categorical and quantifiable. When the values of data cannot be measured numerically but can be classified into categories or placed in rank order is called categorical whereas if the values are measured numerically as quantities then it is called as quantifiable data. (Saunders et al, 2003, pp. 329)

According to Dey (1993) and Healey & Rawlinson (1994) Quantitative data is based on meanings derived from numbers, it results in numerical and standardized data & helps in doing analysis with the help of diagrams, charts, graphs & statistics. (Saunders et al, 2003, pp. 378).

Primary data for this research was basically collected by distribution of questionnaires to the customer’s visiting the bank (Punjab National Bank, UCO bank) and non-banking financial institutions (Citi Financial, Tata Finance).


According to Dey (1993) and Rawlinson (1994) Qualitative data is based on meanings which are expressed through words and it results in collection of non standardized data which requires classifications and the analysis is conducted by using the conceptualization. (Saunders et al, 2003, pp. 378)

According to Miles and Huberman “qualitative data corresponds to words rather than figures” (1984b in Thietart et al, 2001, pp. 78)

The research that provides findings which are not arrived by any statistical procedure or by any other means of quantification. This research refers to a person’s life, experiences behavior, emotions, feelings and also tells about structure & function of an organization, social and cultural movements & interactions. (Strauss and Corbin, 1998, pp. 11)

According to Stern (1980) “Quantitative methods are used to find important and real facts about which very little is known or about which more facts is required to gain more understanding”. (Strauss and Corbin, 1998, pp. 11)

Qualitative research involves all the processes & meanings which are not measured or examined in terms of quantity, numbers & volume. It stresses on reality, tells about relationship between researcher & what is studied, situational restrictions and limitations. (Denzin and Lincoln, 1998, pp. 8)

According to Robson qualitative data is associated with concepts and characteristics which are based on a person’s own goal’s to search a subject in a real manner. There is no standardized way to collect data in qualitative research. The data collected is classified into categories and then it can be analyzed in a meaningful manner. (2002 in Saunders et al, 2003, pp. 378)

Data, procedures and written & oral reports are 3 main components of qualitative research. Data comes from interviews, observations, documents. Where as procedures includes organizing & explaining the data, and written & oral includes articles in journals/books & talks in conferences. (Strauss and Corbin, 1998, pp. 12)

Saunders (2003) says that “qualitative analysis involves the following activities:-

  • Categorisation
  • Utilising Data
  • Recognizing relationships & developing the categories you are using to facilitate this
  • Developing & testing hypotheses to reach conclusions.” (Saunders, 2003, pp. 380-381)

According to Nelson et alQualitative research use semiotics, narrative, content, discourse, archival and phenomenology, hermeneutics, feminism, rhizomatica, deconstructionism, ethnographies, interviews, psychoanalysis, cultural studies, survey research,

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