Banking Article, Banking Finance 2023, Banking Finance October 2023


There has been a history of frauds in banking system since long. With the passage of time, many new methods are being adopted by fraudsters.In the RBI annual report, it is mentioned that FY22 saw more number of frauds reported by banks and other financial institutions. but value decreased by half. In 2021-22 , frauds to the tune of Rs. 60,414 crore were reported, down 56.28 % from Rs. 1.38 trillion in 2020-21. In terms of number of frauds, these entities reported 23.69% higher frauds, at 9,103 in 2021-22 as against 7,359 frauds in 2020-21. The RBI data considers frauds of Rs. 1 lakh and above only. In publicly available sources, insider involvement and management, dishonesty or breach of regulatory guidelines was the major reason.

While the number of frauds reported by private sector banks was mainly on account of small value card/internet frauds, the fraud amount reported by public sector banks was mainly in loan portfolio.

Also, frauds have occurred in the loan portfolio, both in terms of number and value. In the number of frauds, advances constituted 42.2 per cent and in value terms it was almost 97 per cent at Rs 58,328 crores. Cards/internet constituted 39.5 per cent of the number of frauds but in value terms it was just 0.2 per cent.

Frauds can be broadly categorized into external frauds and internal frauds. However, frauds in banks arising out of both system and human failures may be grouped into 4 categories on the basis of perpetrator of fraud

  1. Frauds committed by employees.
  2. Frauds committed by employees in collusion with outsiders who may or may not be customers of the bank.
  3. Frauds committed by outsiders / customers with insider support / involvement.
  4. Frauds committed exclusively by outsider who may or may not be the customer of the bank.

The points 1 & 2 above clearly mention that such frauds happen due to involvement of employees/staff in such frauds. The reason behind such involvement is lack of ethics and ethical behaviour. There is a need of ethics to be followed by every employee whether it is business, governance,  banking, other financial institution and other places.

In this article, we will discuss in detail, the various aspects of ethics in business, banking and the habits/values to be developed to become an ethical banker.

The purpose of business is to make money.If it does not, it will fail in its primary objective. It should be in the ethical way. Ethics is equally pertinent for individuals as well as for the business.The word ethics is derived from the Greek word ethos(character) and from the Latin word mores (customs).Together, they combine to define how individuals choose to interact with one another.In philosophy, ethics defines what is good, both for the individual as well as for the society, and establishes the nature of duties that people owe to themselves and to one another. Hobbes is called the father of modern ethics.

There are three dimensions of ethics namely personal, professional and managerial.Certain values that are essential for professional are responsibility, respect, fairness and honesty.In business, ethics deals with the question whether specific business practices are acceptable.In case of managers, business ethics helps in arriving at ethical decision during complex situations. For example- In a sales presentation to a client, should a sales person omit the facts about a product’s poor safety records? Ethics for the managers is a combination of a moral person and a moral manager.It also means communicating openly, explicitly and frequently about ethics and values. Personal values have significant influence on ethical decision making. For example, doing personal work during officers such as searching on the Internet, taking credit for others work, doing homework of the children at office time etc.

Ethics is known as moral philosophy and as a science of morality.Ethics can be described as a science that examines the general principles for determining the true worth of the ultimate ends of human conduct.Ethics that develops principles pertaining to the morality of human actions is general ethics.While application of principles, developed in general ethics to people’s conduct towards themselves, other human beings, society and the state is special ethics.Special ethics is also known as applied ethics.Hence for an individual, values and judgments play a critical role whenever he or she is making ethical decisions.

Consequences of ethics in human actions:

Ethics significantly focuses on human behaviour, which is driven by human actions. Ethics is concerned with human actions that are deliberate i.e.

  • it was done voluntarily
  • It was done with some knowledge
  • Such actions were freely done

Human actions are subject to scrutiny, if the action is carried under the factors such as-

  • Ignorance or lack of knowledge
  • Passion
  • Under the influence of fear
  • action influenced by violence
  • Actions performed out of habit or voluntariness
  • Temperament
  • Pathological states

Business Ethics and Business Values

Business values are an informal term and it explains the core principles or standards that guide the way business is done. Values sum up what your business stands for and what makes it special.

Business Ethics Business Values
Ethics refers to the guidelines for conduct that address questions about morality Value is defined as the principles and ideals which help them in making engagement of what is more important
Moral principle system Induces thinking
What is morally correct or incorrect in the given situation? What we want to do or achieve?
Magnitude of rightness or wrongness of one’s options It explains the level of significance


Principles of Business Ethics

Being ethical is of utmost importance for business in present times. Every organisation needs to have a standard code of ethics.  Influence of strong business ethics will lead to a profitable and successful business firm.  The following undernoted business principles can result into an unprecedented business success:

Dignity:The most important principle of ethics is to treat each other with utmost respect regardless of difference, which is treating each individual as an end rather than as a means to an end.Similarly, while dealing with customers, a business’ ultimate objective should not be only profit making but also the customers’ interest.Courtesy is a major element of dignity, and it is essential to treat people with courtesy.

Fairness:It is about displaying concern with actions, process and consequences that are morally right, honourable and equitable. The primary advantage of fairness is that it establishes moral standards for decisions that affect others.

Honesty: Honesty means being truthful and straightforward. It is an attribute that is largely linked to an individual rather than a situation.Integrity is also linked to honesty.

Openness:The concept of openness is that things should be as they are supposed to be, and not in a concealed manner.

Reputation/Goodwill: Goodwill is one of the most important assets of a business and also one of the most difficult to rebuild, if it is lost. Business should work on building a good reputation along with high morale for its staff. Good reputation or goodwill helps in resolving many problems and also has a material value.

Prudence:It is the ability of a business to make right decision and which is gained over a period of time from experiences and knowledge.It is required to exercise a degree of judgment that makes the situation no worse, but rather improve the circumstances.

Concern for others/Social responsibility: Every business takes birth, survives and grows with the consent and corporation of the society.Since, it is an integral part of the society, it makes the business morally responsible towards society to build a better quality of life by harmonizing organisational actions with society wants’.

Need and importance of ethics in banking

Similar to any other type of business, there a lot of reasons for ethics to be implemented in banking because it’s create credibility for the banks as it is related to punctuality of fulfilling obligations and honouring the terms of contracts. Banks need to deliver high quality service to its customers.  Also, with the continuing progression of internalisation, along with the global integration, the continuous financial innovations have brought the possibilities of minimum direct influence on banking operations.Ethics helps in dealing with dilemmas, guards reputation and Goodwill as well as helps to avoid risk.

Principles of ethical banking:

Principles of ethics in Banking business provide a guideline to the banking professional, which helps them to deal with the ethical issues. Banks are responsible not only towards its customers, but also to its employees, community, investors and Government.

Trust : The first and foremost principal of ethical banking is trust.Money being an integral part of the economy and standard medium of exchange across the world, the whole banking system is dependent on the trust of the society.Trust is the confidence in quality for attribute of a person or a thing which also includes truth of a statement, truthfulness and trustfulness.Trust is defined as a vital factor in successful leadership and management.Mutual trust has significant importance for successful functioning of any business system.

Integrity: It is a very important for business ethics and moral behaviour.This principle means that there is no intention to treat the business partner in an immoral way, whether it refers to deception, theft or some other undesirable way of treating a business partner.

Neutrality:Bank should not differentiate among its employees and customers and refrain from any kind of biased behaviour.

Reliability:Banks should provide information to its customers that is understandable, clear and accurate while performing their services and operations.

Transparency:Banks should keep its customers clearly updated about their rights and obligations and all aspects of products and services offered to them.

Responsiveness – Local government should always try to serve the needs of the entire community while balancing competing interests in a timely, appropriate and responsive manner.

Ethics and Morality

For it, first we have to understand what morality is. Morality is the belief system of society, culture or religion.  It is the values an individual has and it helps differentiate ‘right’ from ‘wrong’. Morals are standard rules created by society. It is for an individual to decide what is right and follow the morals.For example – speak truth, being loyal, should not steal, be patient etc.

In certain cases, being morally correct might not mean that it is objectively right and therefore, sometimes an action maybe morally correct but it might not be correctly legally or vice versa.

Difference between Ethics and Morality

  1. Morals are general guidelines framed by the society, like respect your elders while ethics is an application of these guidelines to a particular situation.
  2. Morals are prescribed by society, culture or religion whereas ethics thatgoverns an individual’s life is chosen by individual himself.
  3. Morals are largely related with principles of right or wrong.On other hand, ethics emphasizes more on right and wrong conduct.
  4. Morals usually differ from society to society and culture to culture as opposed to Ethics,which remains identical, irrespective of any culture, religion or society.
  5. Morals do not have any business applicability, while Ethics is broadly pertinent in the business as business ethics.

Ethics is about moral principles. Codes of ethics are general standards which have to be uniformly followed by everyone engaged in the same profession. Code of conduct is enforceable while codes of ethics are standards which have to be followed voluntarily by members in the interest of their clients as well as their own.

Code of ethics is required:

  • To define acceptable behaviours
  • To promote high standards of practice
  • To provide benchmark for members to use self-evaluation
  • To establish a framework for professional behaviour and responsibilities
  • As a vehicle for occupational identity
  • As a mark of occupational maturity

Code of ethics includes codes of ethics of integrity, objectivity, competence, fairness, confidentiality, professionalism,diligence and codes of ethics of compliance.As a regulator, building these codes may not be a big challenge but the critical part is how an organisation like a bank can deal with the same internally.


Personal Ethics and Business Ethics

Personal ethics:Personal ethics is a class of philosophy that governs an individual’s beliefs about morality and correct or incorrect behaviours.Personal ethics is the basic standards and values that influence interaction among individuals.

Business ethics:Business ethics can be explained as either written or unwritten codes of guidelines and values that influence the decisions and actions within a company.In the business world, the organisation’s culture sets standards for determining the difference between good and bad decision making and behaviour.

Conflict between Personal ethics and Business ethics:

Ethical clashes or dilemmas may arise in several situations like:

  1. The individual ethics may clash with the group ethics predominant in the organisation.
  2. The individual ethics of a single powerful person in the organisation may be predominant in the organisation. If that individual is ethical and works for the good of all the shareholders, it results in the positive outcome but if that person is unethical, it may result in negative impact on the organisation.
  3. In some cases, employees may be taught to ignore any issue, which he or she thinks is unethical.

Although it is important to resolve these ethical dilemmas, the answer is not to compromise and go along with management or the group on business ethics issues. Open discussion of ethical issues with honesty is important to successful ethical decision making.

Application of BusinessEthics:

Ethics of human resource management: Ethics is significantly important in  Human resource management since it is concerned with human issues, such as health and safety at workplace, skill enhancement and development, compensation  and overall employee – employer relationship.

Ethics of sales and marketing: Ethics in marketing is a philosophy that promotes honesty, fairness and responsibility in all sales and marketing activities performed by an enterprise. Since advertising is a mode of communication, therefore it should not be misleading and manipulative.

Ethics of production: Business needs to provide its customers best quality products, and should not compromise to s\achieve cost efficiencies. Production process and technology should also be updated to match administered standards.

Ethics of finance: Professionals in business of financial services have to serve both their customers and company with integrity and honesty. They must avoid conflict of interest and provide information to its customers in full accuracy, fair, timely and understandable manner. Professionals must also respect the confidentiality of information they obtain during the course of business and should not use it for personal advantage.

Ethical dilemma

 Ethical dilemma occurs when there is a clash between two rights.It is not disagreement between right and wrong but it is a conflict amongst two equally right moral perspectives. An ethical dilemma exists when one is faced with having to make choice among the following alternatives

  1. Significant value – conflicts among differing interest
  2. Real alternatives that is equally justifiable
  3. Significant consequences on stakeholders in situation

Ethical dilemma are required to be thought about and analyzed in a broader perspective. Steps for dealing with ethical dilemma are as follows-

  • Acknowledge that there is a moral issue
  • Ascertain the people who will be affected by the decision. Also, determine your role.
  • Gather the facts about sequence of occurrence of events.
  • Ascertain your test for right vs. wrong. How would you define the problem, if you were to stand on the other side of the fence.
  • Ascertain the test for right versus right theory For example trust vs. loyalty, justice vs.mercy etc.
  • Your approach must look reasonable and persuasive.
  • Investigate if there is any third way out of the situation
  • Make decision take action
  • Revisit and reflect on the decision

Ethical dilemma exists in providing banking services to the customer during various phases.For instance, opening an account, KYC norms have been adhered to or not, charging the interest on different products and services, disbursement of loans and advances as per the process and need of the customer, carrying out due diligence in credit proposals, monitoring the account for timely represent and proper implementation of provisioning norms etc.At every stage, the bank staff should follow the ethical principles not withstanding any outside or inside pressures.Staff must refer to the Law or Code of Ethics or internal guidelines.

Business Ethics and customers

Customer being the back bone of the banking business, it is essential that both parties i.e. bank and customer understand all ethical dimensions in conducting the banking activities.

Starting from the account opening to the end of closing the account, the life cycle of a customer relationship with any bank is to be covered by the Code of Ethics laid down by the management of the bank in line with the regulatory framework.Business ethics refers to honesty, integrity, loyalty, correctness, care, respect for others, respect for law, and concern for excellence, leadership, reputation and responsibility.

Consequences of unethical behaviour can lead to:

  • Affecting fame and reputation of the bank
  • Disappearance of the bank
  • Losing clients and business partners
  • Wasting resources to hide unethical behavior
  • Cheating customers with unfair practices/pricing
  • Dishonest/misleading advertising
  • Breach confidentially of customers/clients

In the recent past, it can be observed that there has been an increasing gap between customer expectations and the banking services. Post 2008 global financial crisis, regulatory measures held in regaining customer confidence.However, instances of ethical problems and dilemmas continue to shake the customer confidence.

Ethical considerations begin with every stage of managing a customer.One should not entertain customers based on their affinity with caste, religion or economic status in the society.Bank staff should be training such a way that they understand the adverse impact of one dissatisfied customer that can create a negative image for the bank.

Ethics in marketing mix

Ethical marketing is aimed at promoting honesty, fairness and responsibility in advertising based on set of laid down guidelines to ensure that the right communication is taking place.In practice, it is necessary that banks use fair practices to compete with each other.Ethical dilemma ariseswhile providing after sales service to the customer.During the sales, one may promise some benefits of the product and does not provide any after sale service.If the banker is not able to provide the required service to the customer, he/she has to explain the customer well in advance what to expect and what not so that customer is clear about the facts.

Unethical marketing practices can be observed in cases of managers having negative personality traits that prompt from self-interested manipulation in interpersonal relationships and may lead to an ethical behavior.Aggressive mis-selling of banking products like interest rate and foreign exchange derivatives, to small and medium enterprises without making them aware of the inherent risks involved, have caused losses not only to the businesses but also to the bank as most of such most became NPAs.

Ethics in advertising and product promotion

Banks are expected to follow the laid down ethical framework in advertising and promoting their products and services.Ethics in advertising refers to

  • Conveying the information of product or service clearly
  • Information that helps customer’s buying decision
  • Advertisement should contain true and honest information of the product or service
  • Advertisement should not be deceptive
  • Advertisement should not exploit emotions
  • Advertisement should respect human values

Abuse of Official Position

Employees are advised to follow Code of Conduct laid down by the bank. Abuse of official position for personal gains or providing gains to friends, family members and others with selfish motive, amounts to violation of employee’s obligation to the bank.Examples of abuse of power can be:

  • Bank employee goes for a personal travel and claims reimbursement as official
  • Showing discrimination to the customers based on their proximity to the employee (his/her relatives, friends etc. showing special preference)
  • Use of official resources for personal use
  • False claims beyond the fixed perquisites

Insider trading: Employee trading based on the internal information of the client which is not available to the public amounts to insider trading.

Proprietary data: Proprietary data refers to the information relating to the intellectual property rights and trade secrets of any company.

Bribes: Bribes refer to paying money or gift to person with a motive of getting some favour done.

Employees as Ethics Ambassadors and Managers as Ethical Leaders:

The ethical culture from the senior leadership percolates down in the bank.However, the employees do not personally knowthe senior leaders. They form their opinions based on what they come to know through others or when they listen to the top leaders. Therefore, the senior leadership should convey the importance of ethics in a variety of ways and in such a manner as to reach to every employee in the organisation.If senior managers talk about ethics regularly and also put their words in action, without exception, they will develop a reputation for their ethical leadership.

Work ethics and the workplace

An acceptable ethical behaviour involves an employee’s general set of beliefs, values and behaviour that he/she shapes up for the regular day-to-day method of service delivery dealing with all categories of customers and to other co-employees of the own organisation. An ethical workplace can be identified easily by even ordinary persons who may not have any expertise in fields like organisation theories, philosophy, law communications etc.Following are some of the ways and means to recognize an ethical workplace –

  • Respectful treatment of all categories of customers by the front office personnel Employees’ awareness of the business processes and quick and to the point clear answer to the queries
  • Giving correct and authentic information to customers on matters like interest rates/ premature withdrawal of term deposits etc.
  • Guiding a person on a short visit for multi currency travel card and weather to take fixed exchange rate or go in for real time exchange rate
  • Strict adherence to minimal prescribed documentation as prescribed by the regulator/ internal management and not insisting for additional documents from the borrower
  • Appropriate attire befitting the profession of the employee and it should provide comfort to all the customers who need to speak to the employee
  • Acceptable body language of the employees at the workplace
  • High degree of energy level and commitment to work and going the extra mile to help customers
  • Confining to work related talks and avoiding all other matters not relating to the work directly
  • No direct or indirect hints to customers to meet the employees outside the workplace for any favour for guidance to get a benefit
  • No expectations or acceptance of gifts/favours (irrespective of the amount)
  • Fair and appropriate treatment given to all co-employees
  • A prominent display of the names of all the major officials of the organisation’s branch who are responsible for core activities for the benefit of the customers

The major causes for unethical behaviour at workplaceare as follows

  • Non-availability of Code of Ethics manual
  • Lack of fear of action
  • Unrealistic targets
  • Influence of Co-employees
  • Unprincipled leadership
  • Means are not appreciated

Ethics of a Banker

A banker can be evaluated for ethical commitment at three stages of his/her career

  1. at the initial stages up to first 5 to 7 years of taking up banking as a career
  2. at the middle management stage, typically after 7 to 15 years into banking sector , and
  • at the senior management level, normally after 15 years into banking service

The following are some of the major ethical qualities expected of a banker throughout his/her career

  1. Honesty and Integrity
  2. Commitment to customers
  3. Confidentiality
  4. Fair treatment
  5. Transparency
  6. Duty mindedness

Institutionalizing ethics in bank

Institutionalising ethics in bank refers to creating a Code of Ethics and implementing the code in letter and spirit.It includes all activities of banks like sales and marketing, customer relationship, service delivery, credit management, regulatory compliance etc. Ethics, corporate governance and responsible financing are interlinked.

The employees must be sensitized for the following aspects:

  1. Conflicts of interest
  2. Confidential information
  3. Fair dealing
  4. Policy on social media ]
  5. Employee relations – for the fresher as well as for the experienced
  6. Sharing Bank’s own experience in ethical compromises

Commercial banks in India may also take up some additional measures (mentioned below) to better strengthen the ethical environment in their banks

  1. An officer of established ethical conduct can be handed over the responsibility to look after the ethics (besides compliance)in the banks . He/She may publicize the ethical aspects to all employees from time to timeon bank’s intranet.
  2. Digitisation and online availability of credit appraisals more than what regulator prescribes
  • Felicitating employee of the month for highest ethical conduct
  1. Making all employees to work towards maximization of profits for the bank without compromising on ethical principles.
  2. Acting strictly in accordance with the banking principles and not individual discretion
  3. Not succumbing to pressure from top when there is no justification
  • Helping the loan applicants who are financially most deserving, even if it requires spending extra time and efforts
  • Incorporating ethical conduct as a parameter in annual appraisals

Four broad aspects can be identified to justify why banks need is separate Code of Ethics for their employees. These are

  1. sensitizing their employees to their responsibilities
  2. To display that banks value integrity
  3. To avoid innocent violations
  4. To deal with habitual violators

Why codes of Ethics fail?

Organisations where a code of ethics might grossly and significantly fail to bring in any difference to the ethical working of the employees could be when :

  1. Language used in code of ethics is very complex and ambiguous
  2. Code of ethics commits for something that is very difficult for a bank to ensure
  3. Top management does not find time to periodically meet and take stock of the collated and reported information of employees violating code of ethics
  4. Management either remains biased or is perceived to be biased in dealing similar cases of code violation and awarding different penalties

Way forward

 In the Indian and global contexts, there are adequate number of Ethical Codes.Corporate Governance Codes, Rules from the regulators,Laws, directions from select enforcement agencies and government authorities in context of the acceptable behaviour at work.There is also substantial literature that is available both in the form of books, research reports etc.The fact of the matter is that the ethical behaviour has not yet been imbibed by the entire fraternity of the financial sector. The reasons could be many such as materialistic behavior, greed,negligence, pressure from the unscrupulous borrowers, lack of involvement in work or inadequate diligence and above all the lack of fear that the career will be damaged, if the employeeis caught and faces punishment.

Some ways in which employees may be persuaded to remain ethical in their career and life is through efforts by top managements in the form of training the personnel at the stage of induction and orienting them towards ethical conduct and some motivational sessions by the outside experts who themselves have been known for their impeccable track records throughout their career. Besides, there can be some reward and recognition system for those who have remained ethical in their duties rather than treating it as a job.

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