Banking: A Business of Ethics 

• Banking has been an integral part of life. As empires expanded, the ‘Collection Centres’ concept evolved to collect taxes and distribute wealth.
• Coins of precious gold and silver were issued. The temples were the earliest banks as the same were headed by Priests, whom the king and the commoner trusted alike as the embodiment of ethics, honesty, trust and truthfulness. 
• The lack of steel safes and residential security forced people to keep coins with the Priests in the temple basements. 
• At the owners' instructions, the priests lent their coins to the needy people on loan and collected them back with interest in the shape of a more significant number of coins.
• This saga of ethical operations through a third party trust gave birth to banking. 
• Since times immemorial, Bankers have been trusted as ethical and more close than relatives and friends for the safe custody of the money.

 What is Ethics?

• The term Ethics is derived from the Greek word ethos, meaning custom, habit, character or disposition.
• Ethics is a system of moral principles. It reflects how people make decisions and lead their lives.
• Ethics is concerned with what is good for individuals, enterprises and society. It provides knowledge about morally good or bad behavior.
• It lays down principles that govern a person’s or a Bank’s behavior to conduct day-to-day activities. 
• It measures human conduct that deals with what are right or wrong principles. 
• Ethics is a code of moral rules, principles and values of a business enterprise's interactions with stakeholders. 

 Ethics : The Essence of Life 

Ethics covers the following dilemmas:

• How to live a good life
• Our rights and responsibilities
• The language of right and wrong
• Moral decisions - what is good and evil?

 Ethics is a Set of Beliefs Held in Common By a Group

Same Human Behavior is Ethical or Unethical in Different Situations :

• Chopping off hands as punishment for stealing is acceptable ethics in the Gulf.
• Chopping the hands of an accident patient to save the body from ginger is a righteous act by doctors worldwide.
• Chopping off hands in angry retaliation is not ethical to conduct. 
• Kissing in public is ethical in Europe but a crime in the Gulf countries.  

It can change with time…

• Marrying outside the religion was unethical; now, intercaste marriages are accepted as a way of life…

 Three Types of Ethics 

Ethics defines principles of decent human conduct in life and profession. It serves as a guide for dealing with complex moral issues and conflicts.

There are three ethical theories -  Meta-ethics, Normative-ethics & Applied-ethics.

• Meta-ethics is what you expect opponents to do to you in a game and what they expect you to do to them. It reflects currently popular strategies and tactics, and counter-strategies.
• Normative-ethics is a mutually agreed criterion in the society of designating some actions as reasonable, desirable or permissible and others as harmful, undesirable or improper and branding as what is right or wrong at the current time. 
• Applied-ethics is the application of the practical solutions of ethics to controversial issues like war, animal rights, divorce, disputes and capital punishment.

Professional Ethics 

• A combination of Meta, Normative & Applied Ethics. 
• Encompasses the personal & corporate standards of behavior expected by professionals. 
• Comprises honesty, trustworthiness, transparency, accountability, confidentiality, objectivity, respect, obedience to the law & loyalty.
• The Banking Industry is entirely run on Professional Ethics.

Why Are Ethics Important in Banks?

Banking is the most sacred profession in the world, built entirely around ethics. 

 Banks enjoy high leverage as they can raise a substantial amount of non collateralized deposits, and perform the function of liquidity and maturity transformation. 

 Ethical Banking operates on a core set of principles and ideals that implement etiquette in dealing with third party money in trust. 

 Ethical Banking prescribes:-

• How to interact with clients. 
• How to serve the society & community. 
• How to reward investors & stakeholders equitably. 

 The primary ethical asset of Banking is providing timely funds to depositors and borrowers  &

Book only optimum profits to keep the transaction costs low.

 Banking displays ethical behavior through:

• Transparent accounting standards, checked, rechecked & cross-checked periodically. 
• Cyclicality of funds in the society for the empowerment of the masses.

Importance of Business Ethics in Banks 

• Banking is a business based on trust.
• Trust is based on the belief that banks handle business with integrity.
• Bank’s reputation for integrity is more valuable than its cash, determined by the conduct of employees at all levels. 
• Banks are trusted due to substantial compliance.
• Clients operate banking online instead of dealing with personal bankers; therefore, banks’ image should exude basic ethics of honesty, integrity, truth, & trust.

Steps to Make Banks Repository of Ethics

• First: Maintain consumer confidence & a good reputation with clients.
• Second: Understand the Bank's social license to promote the welfare of society.
• Third: Implement positive corporate culture and a dedicated, motivated and ethical workforce.
• Fourth: Minimize financial risks avoiding legal issues.

 Basic Ethical Principles in Banking

• Before inviting a customer to join as a client, be prepared to serve his/ her needs on liability and assets sides of banking business. 
• Always protect the existing clients, by ensuring a proper KYC of all new incumbents. 
• Create an ambience of safety and security on both online and offline banking platforms.
• Take measured risks with clients’ funds to build confidence and sustain long term relationships.
• Maintain utmost confidentiality of transactions in various accounts.

 What to provide a visiting customer ?

Out of the few benefits the customer expects from a Banker,  the statements of account is the first thing to be provided at regular intervals.

• If no statement is provided, the relationship breaks. 
• Majority of customers join banks to keep deposits.
• They do not expect any loans.
• They look for financial advice. Bankers should be minimally aware of HUF, Succession Rules, Nomination, NRE procedures, Company Law, Income Tax Law, Methods of Investment, CSR Rules, Legal implications and Statutory Violations to win the confidence.
• Regular Audit by third parties enhances the Bank’s reputation.

The rights of Customers must be displayed and honoured to sustain  a reciprocal & everlasting relationship.

 Dissecting Customer Behavior

Important part to focus is Value of Customer’s Time 

• Banking is just a small part of a customer’s day to day to day profile.It is not his major activity. 
• No customer comes to the bank to while away time. Fast and efficient handling of the transaction is core to the banking relationship. 
•  More customers now operate online and through ATMs. Not many have seen their bank in their lifetime. 
• Ethical  behavior demands immediate attention to the customer transaction for quick disposal.

 Three Visit Policy

 What is the source of Unhappiness to Customers?

• German Banks have a three visit policy for a customer seeking a loan.
• In the first visit, the loan scheme is explained with details of interest, maturity period, down payment margin and security.
• In the second visit, credit terms are finalized, application is received and date of decision on the proposal advised.
• In the third and final visit the loan is sanctioned or rejected. If sanctioned the disbursement is done.
• No need for customers to keep coming to the bank for months to follow loan applications.
• If a customer is harassed for a fourth visit, he can issue a cheque to the bank and purchase the article with the bank morally committed to honour the debit.
• This is ethical banking. Results in low NPAs due to customer satisfaction.

 Deciding Bank Disputes Through Bankers

 How to avoid dragging bank  Loans Disputes 

• In Europe Companies having disputes with banks are referred to Bank Adalats and least to  Courts.
• The Adalats are headed by bankers who understand credit better than legal judges. 
• Cases are decided at the stage of SMA 0, SMA 1 or SMA 2 itself, rarely crossing six months.
• Full provisioning is mandatory so that a true picture of bank profit is visible to stakeholders.
• Bank Balance sheets are comparatively clean and ethical.

 Ethical Challenges Faced by Indian Banks

• India has long been a deprived society due to long British Rule. The majority are poor with weak cash flows.
• The Western EMI System of repaying 12 installments in a year is impractical due to inadequate social systems.
• Family wedding, death, sickness, and school admission of a child take away savings drying the cash flow to pay 12 EMIs.
• Indian Banks have to re-orient repayment schedules as per Indian cultural ethos and practices, with eight to ten EMIs in a year. 
• A customized system alone can work ethically in India.

 Dissecting the Gaps in Economic EcoSystem 

• Verification of Invoices, Stock Statements, Receivables & Sundry Creditors disclosed while availing Loans from banks is cumbersome and not possible. 
• Bankers end up financing wrong clients due to the weak economic ecosystem.
• Fund diversion is rampant due to weak cross checks.
• The legal system needs strength to assert itself to curb malpractices. 

 Dissecting the Embarrassment of Many 

• Most Indian banks are indulging in mass banking. 
• The aspirational Indians are crowding the banks for economic favours. 
• The State has assigned non banking jobs to banks further squeezing the customer due diligence time.
•  Laws need a relook to delegate the pre-loan checks to the Credit Rating agencies before a borrower comes to the Bank. 
• The milling crowds at Banks need to be converted into assets rather than liabilities.

Unethical Behavior Increases Cost of Business 

•  With most Indian Banks bleeding with NPAs, banking has become a challenging business to earn profits. 
• Decisions of large credit dispensations taken with soiled hands have resulted in quick mortalities of large assets. 
• Compromising with etiquettes of lending by making borrowers chase the credit decision for months has turned them angry and hostile. There is reluctance to repay on time. 
• Compromising integrity in credit decisions has multiplied the bank losses in terms of provisioning, write-offs, legal expenses and OTS. 
• Unethical and indiscreet banking behavior has increased the operational costs making banking an un-viable business.

 The Messiah of Ethics  

• Immediately after Independence, Father of the Nation, Mahatma Gandhi, travelled in a train where an old coughing man lay on the opposite berth.
• The older man repeatedly coughed and spitted the sputum near the berth.
• None of the accomplices bothered to stop the older man from spitting. No one tried to clean the sputum.
• On the older man coughing again, the Mahatma brought both his hands near the mouth of the older man and took the entire sputum in his hands. 
• Bapu then proceeded towards the train toilet, disposed of the spit, cleaned his hands, and occupied his berth.
• The family persons accompanying the older man realised the mistake and took the older man to the bathroom to clean his throat well. 
• Many bankers overlook the unethical misdemeanor of their colleagues and passively support their misdeeds. This dishonest attitude of ignoring ethics is harming the banks.

 Ethical Issues & Challenges Faced by Indian Banking Industry 

 Inadequate Corporate Governance in Banks 

• Good corporate governance is essential for all institutions; the governance structure and processes of the banks are expected to be even more robust.
•  Banks’ business model is very different from other business entities, as they can raise a substantial amount of un-collateralized deposits.
• The governance structures and practices in the banks should prioritize the protection of the interests of their depositors. 
• However, bank management has become profit-oriented rather than service-oriented.
• Cross-selling of Insurance, Mutual Funds, Gold Bonds & Commercial goods through sites like YONO has brought Corporate Governance into question. 

 Poor Oversight & Assurance Functions 

• With the growth in size, the focus on the adequacy of the governance framework for identifying, addressing and managing risk has wavered: 

Banks must have  ‘three lines of defense’ as critical responsibilities: 

• • The Business Functions’, which are the risk-takers and owners of the risk, have the responsibility of managing the risk generated by their day-to-day business activities; 
  • The ‘Compliance function’ has the responsibility of exercising oversight on the business functions to ensure that their activities are within the risk and compliance policies of the bank; and 
  • The ‘Internal audit function is responsible for identifying gaps in prescribed requirements and reporting to the Board / Audit Committee. 
• Collectively, these three functions have to assure the Board about the adequacy and effectiveness of the governance framework and that the Board approved policies and business strategies are adhered to in the conduct of its business. 

Subdued Monitoring Functions 

• Internal Audit: RBI has issued guidelines for strengthening audit governance regarding Risk. But the Internal Audit has failed to contain NPAs and Frauds.
• Risk-Based Internal Audit (RBIA): Enhancing the authority, stature, and independence of the Internal Audit Function has not delivered any semblance of credit quality and compliance. 
• Risk Management: RBI has issued guidelines on Risk management systems for banks way back in 1999 to bring uniformity in the approach followed by banks, the delinquencies in credit exposure are rising alarmingly. 

 Ineffectiveness of Bank Boards

• Through a discussion paper in June 2020, Reserve Bank has proposed substantial improvements to the Board governance framework of banks to Empower the Board of Directors to :
• a. set the culture and values of the organization; b.recognise and manage conflicts of interest; c. set the appetite for risk and manage risks within the appetite; 
• The containment of recalcitrant accounts is still a challenge across Retail & Wholesale assets. 

 Bank Boards Found Wanting on 

• Improvement of the supervisory oversight of senior management; 
• Achieving a clear division of responsibilities between the Board and the management; 
•  Separation of ownership from management. 

 Strengthening the Bank Boards
The Board members should focus on strategic and vital issues. The time allocated to essential agenda items is often found to be inadequate. Many times, a large number of Agenda items are included, including table items, which do not allow for proper evaluation of the proposals. 

• The Board also needs to work cohesively. Banks should be board-driven and do not end up being dominated by individuals. Experience has shown that this leads to undesirable consequences.
• RBI has mandated banks to have awareness training programmes for their Board of Directors and senior leadership team and familiarise them with IT and cybersecurity concepts. 
• The Board must look at cyber risk as an enterprise-wide risk management issue rather than a pure IT security issue.
• Adequate and required levels of investments in technology should be ensured. 
• Whether the institution has the appropriate skills, resources, and approaches to minimise the cyber risk and mitigate any damages that may occur also needs to be seen. 

 Scope of Governance Improvement

Need of the hour  is:  Empower the Board of Directors to :

• Set the culture and values of the organisation; 
• Recognise and manage conflicts of interest;
• Set the appetite for risk and manage risks within the appetite.
• Failing the above, Indian Banks will remain ethically deficient in achieving world-class stature. 

Supervisory Expectations 

 An ethical bank is expected to have  :

• Effective engagement and support from the Top. 
• Top Management has a crucial role in value creation, strengthening public confidence, enhancing reputation, and maintaining its business integrity. 
• The Board should assure functionaries of direct and unfettered access. 
• The “tone from the top” should set the pace for an organisational culture that values honesty and integrity. 
• Appointment and removal of heads of audit and risk compliance functions should have stringent barriers, and they must be independent of executive management. 

 Ethical Responsibility of Middle Management in Banks

 A bank’s Board needs concise, accurate and timely reports to help it perform its fiduciary responsibilities.

 The reporting authorities in banks are ethically bound to report: 

• Is the bank’s strategic plan realistic for the bank’s circumstances? 
• Is the bank’s business risk-taking aligned with its approved Risk Appetite? 
• Is management meeting the goals established in the planning process?

 Do earnings result from implementing planned bank strategies, or transactions generating short-term gains but longer-term risk? 

• Do policies and procedures safeguard against conflicts of interest, insider fraud and abuses? 
• Does the bank have sufficient capital to support its risk profile and business strategies?
  

Are financial reports and statements accurate or reflect the bank's actual financial condition? 

• Are the bank's Strategies aligned with the future needs and requirements? 
• Is the bank spending on IT systems adequately to maintain robust IT infrastructure and make it scalable per the growing needs and challenges?

Ethics: Life & Soul of Banks

• An Ethical, efficient, and vibrant financial system is crucial to the country's economic development and social harmony. 
• An ethical governance framework plays a central role in value creation for stakeholders and ensures the board's oversight of the risk appetite and culture of the Bank. 
• Moral internal defences help build strong, resilient, disciplined Banks to expand the benefits of sustained growth and customer confidence. 
• An ethical ambience inside a bank pre-empts supervisory actions and attendant reputational risks if transgressions are detected. 
• No one can bank on the bank with no ethics….

 Ethical Communication at Workplace 

If there are any precious Intangible Assets in a Bank's Balance Sheet, it is Ethics…

• Each bank should have a Chief Ethics Officer.
• The body language, behaviour, recovery, and compromise settlements should all be articulated through ethical communication.
• Ethical conduct should not be the front office's job alone; it should be the job of the entire bank.