A Study on The Factors affecting the Loan decision of the Customers of Capital City of Nepal

Abstract

The need of the customers has always been a significant concern for the banking and financial institutions regarding the loan requirement and the financing need because the actual lack of the financing is always backed up by the desire to repay the loan and the desire to demand more loan in future times. Since the banking and financial institutions has increased to a large number in the present context in comparison to a decade earlier, and the competition has reached an extreme level. With 28 commercial banks, more than 70 development banks, more than 75 finance companies, and several other co-operatives the market liquidity has been increasing day by day whereas the funds are not being invested in the place or sector that yields sufficient return that covers the cost and adds profit margin to the business. Because of the idle money, the value of fund of major banks and financial institutions is above 5% in the present context which has made them relatively less competitive in the market. The present study entitled “Factors affecting the Loan decisions of Customers in capital city of Nepal” is undertaken with the specific objective to identify the influencing factors that customers consider while taking out the loan from banks and financial institutions. Accordingly, other primary objectives of this study are to determine the various variables that affect the loan decision of the customers and to define the degree of influence/significance of the relationship between the identified independent variables with the loan decision of the customers. The research was done on the topic “Factor effecting the Loan decision of Customers in Capital city of Nepal.” A comprehensive literature review was conducted in which the concepts of various types of loans, the reasons for seeking the loan and the relationship between independent variables, i.e. variables affecting the loan decision of the customers and the loan decision of the customers were reviewed and discussed from both customer and banks perspective. Various researches, articles by multiple authors, scholars were reviewed and discussed. For the study, literature reviews of the various studies that have been conducted on or similar to the subject in different parts of the world were reviewed. The hypotheses that were required to fulfill the research objectives were derived from the literature study. A conceptual model was also developed taking into considerations the various variables and perceived relationships among them. For this study, a survey study was conducted to find out the relationship between the independent variables and dependent variable. The independent variables taken were quality of service provided by BFIs, satisfaction received by the customers from the service provided by BFIs, different loan covenants, the loan product itself, the installment structure on loan, the requirement of the insurance policy and guarantee and the interest rate on loan. The dependent variable was the loan decision of the customers. Questionnaires from a total of 219 respondents were collected and used for further analysis. The data collected from the respondents were analyzed and interpreted through the help of different statistical tools and results derived from the hypotheses testing were presented using different figures and graphs. The study includes demographic profile of respondents such as age, gender, academic qualification, employment status and monthly income. Descriptive statistics of different factors were studied. Cronbach's Alpha and Pearson correlation tests were used to infer the results of the study. After analysis of the data, we can conclude that there is a significant relationship between various variables such as quality of service, satisfaction level of the customer, interest rates on the loan, loan covenants, installment structure and the loan product whereas no significant relationship was found between the insurance and guarantee condition of the loan. Similarly, through the data from both banks’ respondent and customers, it has been tried to find the similarities and deviations of the influence of the independent variables towards dependent variable. After the analysis of the data collected from both side, it has been found that there is a high deviation in responses in two sub-variables of the independent variables. They are the influence of the sufficient number of bank personnel and the influence of others. Apart from these two, all the sub variables have similar kind of response from both banks and customers. Similarly, to identify the correlation between the multivariate variables, canonical correlation analysis is used. Further, this study has provided various areas for future research. The areas include the development of products that are demanded by the customers and meet the need of the customers, focusing on the behavioral changes of the customers due to emerging competition in financial sector and mainly focusing on the service quality and conducting customer centric business.