Banks play vital role in the economic development of a country. Banking and
financial sectors are undeniably the strongest backbone of any economy. This
attributes to a country’s economy being in good shape which is linked to the
banking sector’s smooth operation. They have evolved from traditional banking to
modern online banking. As a result of changing times, banks have seen newer
things and have reached greater heights.
Confidence, ethics and trust amidst
these remains as the heart of banking system. Nonetheless, various scams have
been witnessed in the Indian private as well as national banks such as Punjab
National Bank, Yes Bank scams etc. Additionally, there have long been ethical
concerns about practices such as insider dealing, consumer and market
manipulation as well as mortgage loan malpractices. While the ethical
consequences of these malpractices may differ, the need of the hour is to
continually review and strengthen the operations in order to cope up with the
rapid pace of transformation in the business.
Good corporate governance should be an important part of bank management in
order for banks to work efficiently. Good Corporate governance is essential in
banks and must be more than just complying with legal and regulatory requisite.
It promotes good business management and regulation, allowing banks to uphold
good business ethics and thereby providing value additions to stakeholders.
Corporate governance of bank is very different from other corporate entities
since functioning of banks and corporate entities is different. Thus, the
consequences are restricted to stakeholders if there is failure of corporate
governance in corporate whereas it can have serious consequences on financial
system at large in case of failure of corporate governance in banks since the
impact can swiftly spread through other banks.
Overview Of Ethics In The Indian Banking System
Ethics is gleaned from the Greek word “ethos” which means character. It is a
subject that deals with the good and the bad in terms of moral responsibility
and obligation. It is an embodiment of moral principles which aids in defining
what is wrong and right in human conduct as well as what ought to be.
are various unethical issues and challenges but corruption is one of the major
issues in which public office is used for personal gains. Currently,
institution’s size, unhealthy competition, incentives, conflict of interests,
discrimination and struggle to remain in the market are major reasons for
unethical practices. Ethics is defined as cardinal principle and basic concept
of good human conduct. It incorporates study of various universal values such as
adherence to the rule of law, equality of all men and women, health and safety
of all and also of the environment.
A.Fundamental Prinicples Of Banking Ethics
This means taking actions based on values instead of seeking
personal benefit from another person. To follow strong moral principles and
being honest with everyone while doing any activity or operation
Success reaches those who respect humans and don’t
discriminate. Refrain from discriminating anyone on the basis of race,
caste, social status, sex and finances in the institutions. Further, there
should be no discrimination against the employees and customers.
This means that all the information provided by the bank to
their customers should be clear, accurate and understandable with mutual
trust in all the services they render. In this way they can serve the best
to their customers and services must be timely done.
The information regarding customer’s rights and
obligations as well as benefits and risks must be clearly provided by the
bank. Before providing any product, service or advice the bank must
efficiently determine their customer’s financial needs, ability and status
and offer their products and services accordingly.
- Information Abuse:
The banks must take all the appropriate precautions
and steps to avoid misuse of insider information of themselves and their
B.Ethical Issues And Challenges
- Rude behavior towards customers:
At times Indian bankers are rude and
their behavior is unfavorable and non- cooperative towards customers may be due
to high work pressure, lack of expertise, unfavorable behavior on the part of
customers and various other factors.
- Problems faced By Banking Industry in India:
- Banks Not able to make enough money:
Even though there are headlines relating to banking profitability but still
the banks in India are failing to generate the necessary return on
investment or return on equity that shareholders need.
- Customer’s Expectation:
Nowadays, it is all about customer’s satisfaction and experience. Hence,
many banks are under pressure that they are not being able to provide the
quality of service that customers want, especially in terms of technology.
- Adaption of Technology Issues:
This is one of the major challenges
faced by the banks and their employees because they do not have adequate
understanding of technology and are not thoroughly educated on it.
- Regulatory Authorities Pressure:
Regulatory requirement continue to rise and banks must pay out significant
portion of their discretionary expenditure to compliance and the development
of systems to keep up with the increasing requirements.
- Unethical mortgage lending practices:
Various issues such as lack of
control by the financial institutions, excessive leverages, subprime mortgage
lending among many others have led to this problem. Unethical behavior of the
executives working in financial institutions as well as their negligence is the
root cause of these problems. “Additionally, some more problems in this are
Sub-prime mortgage, Predatory lending, Complex debt instrument, Shadow Banking
System, Fraudulent loan terms.”
- Global Banking:
Global banking is making inroads into the Indian Banking
sector and for long term growth and development industry must embrace the
integration phase knows as globalization as India opened its doors for
international firms in 1991. The effect of globalization creates problems for
domestic businesses because they have to compete with foreign players. There are
36 banks operating in India’s banking sector which poses a significant challenge
to both nationalized and private sector banks since they are very large in
scale, technologically advanced and have a strong presence in the global market
providing better options to Indian customers.
- Money Laundering
- In last few years, especially after the terrorist attacks of 11th
September 2001, global efforts to tackle money laundering and terrorism
funding have taken on increased importance. Money laundering and terrorism
funding are major global issues which effects the economic growth by not
only compromising with the stability, productivity and accountability but
also threatening the security
- The International Monetary Fund reports that laundered money produces
$590 billion to $1.5 trillion per year, accounting for around 2 to 5% global
- Money laundering and terrorism funding can have catastrophic economic
and social implications for developing countries and those with weak
- The term money laundering describes the process of concealing the true
owners of illegally obtained with the funds
- This procedure gives illicit funds credibility by "washing" them through
different agencies "so that they can be used without detection of the
illegal activity that created them." This procedure gives illicit funds
credibility by "washing" them through different agencies "so that they can
be used without detection of the illegal activity that created them."
- Development of a responsible corporate- profit should not be the sole
- There should be transparency and clarity between the Bank and the
- Banker’s position of authority should not be used to abuse or exploit
- There should be a sense of corporate citizenship while acting or
- All should be treated equally or in the same way. Compliance should be
done by focusing on integrity.
Overview Of Corporate Governance In The Indian Banks
Like any other organization, good corporate governance in bank regulates
relation between shareholders, management and the board. It helps to resolve
conflict of interest between the shareholder and depositors as well as between
managers and board. Additionally, prevents abuse of power and limits imprudent
behavior by the bank executives. Good corporate governance is necessary for the
overall stability of the economy.
A.Challenges And Priorities In Corporate Governance
The below mentioned issues are relevant for many participants such as Banks,
association of banks, stock exchanges (BSE & National Stock Exchange), RBI and
SEBI as bank supervisor and capital market supervisory respectively. These
issues are based on the principles of good corporate governance provided
under “Basel Committee on Banking Supervision in 2006” as well as the “Ganguly
Committee’s recommendations in 2002
- Duties of Board Members
Since banks accept and handle people’s money, bank board members must be
particular of their fiduciary duty that is “duty of care” and “duty of trust” to
depositors. These responsibilities cannot be carried out entirely, correctly or
efficiently unless adequate skills and personal abilities are possessed. It is
important to conduct training programs provided by RBI, SEBI etc. which enhances
the knowledge and skills of the board members.
Even though the RBI is primary/main authority for ensuring bank’s proper
disclosure, SEBI is not exempted from its duties; it is expected to exercise
supervision and implementation of audits, accounting and non-financial
disclosure. Disclosure problems found by one of the two regulators should be
informed to other organizations as well for corrective measures and sanctions.
- Functions of Board
Boards should be more concerned and involved in board strategy instead of being
embroiled in bank management of routine activities. Specifically, the board
should concentrate on:
- Directing and supervising the bank’s strategic goals, corporate policies
and values, essential one of which is the development of a code of ethics
for bank staff, management and board members.
- Establishing clear lines of duty and accountability across the bank, as
well as stringent internal control mechanism. This would help to ensure
- Establish special committees of board
Formation of various types of committees such as risk management committee,
audit committee etc has been recommended by the Basel Committee. Additionally, a
recommendation was also made by the Ganguly committee that the banks which have
issued public shares/debentures must establish a Shareholder‘s Redressal
Committee headed by non-executive director.
- Averting Abusive Related Party Transactions
A reasonable number of independent directors should review and track related
party transactions. Furthermore, for reviewing related party transaction, a
committee of board should be formed mainly comprised of independent directors.
Banks must declare material related party transaction in compliance with
international accounting, auditing and non financial disclosure standards. Banks
may also be barred from participating in some forms of related party
transactions like controlling shareholders and personal loans to board members.
- Board’s Composition
In its position as banking supervisor, the Reserve Bank of India must ensure
that bank boards have established and retained an appropriate level of expertise
as banks have increased in size and complexity. “The Ganguly Committee (RBI
2002) had recommended that bank board be constituted by the blending of
'historical skills' set, (i.e. regulation-based representation of sectors like
agriculture, small industries, cooperation etc.) and the 'new skills' set (i.e.
need-based representation of skills such as, marketing, technology and systems,
risk management, strategic planning, treasury operations, credit recovery
The board should be able to use objective judgment when carrying out
its responsibilities. This will imply management and controlling shareholder’s
independence and objectivity. Additionally, it was recommended by the committee
that a trained Company Secretary be appointed as secretary to the board as well
as a Compliance officer to ensure regulatory and accounting compliance.
B. Role Of Rbi In Ensuring Good Corporate Governance
Instead of focusing solely on regulatory enforcement, RBI should put a greater
emphasis on ensuring good corporate governance of banks. RBI should evaluate the
performance of the entire board since the board’s position is important in
establishing good corporate governance in banks. This can be done by assessing
board meeting minutes, ensuring that board members have access to relevant
information and resources, attending bank board meetings when needed, providing
alerts when necessary and even requesting that the bank reorganize its board
structure and operating procedures in the interests of good corporate
There should be a basic difference in RBI’s role in corporate
governance between private and public banks. In terms of prudential aspects, the
RBI’s regulatory structure ensures that all types of bank are treated uniformly.
Therefore, there should be little difference between public and private bank’s
RBI in association with SEBI should make a code and policy of corporate
governance from which banks could create their own code. In addition, incentives
should be provided by RBI to banks so that they can strengthen their corporate
governance. For, above suggested code, RBI may create a rating system for
corporate governance of banks. Such a rating may be designed as a standalone
rating based on corporate governance or as a part of larger rating system in
which corporate governance variables play a significant role in deciding overall
The rating system of corporate governance must be eloquent and informed
well in advance to all banks so that accordingly they can reorganize their
framework. SEBI also may contribute to the development of the criteria by
sharing its expertise and experience in the field of corporate governance.
Scams: Ethics & Corporate Governace Failure
This was country’s one of the biggest banking scam, involving a huge sum of
around Rs. 11,400/- crores. Fraud was committed by Nirav Modi and Mehul Choksi
who were involved in exporting and importing of diamonds under the listed
company called Gitanjali Gems. No one challenged the source of funding at that
time. Only after few years this fraud came to light shocking the country like
As per the bank, employees provided LOUs without taking any cash reserve or
collateral and didn’t even enter the transaction in the bank’s software. These
LOUs were used as leverage in Hong Kong for obtaining credits from various banks
such as SBI, Axis Bank etc by Nirav Modi and his company. LOUs were issued by
these suspected bank officials through swift which is the medium for
international cash transfer. These banks were aware that PNB had not
incorporated swift in their core banking network. They made the decision not to
document these transactions in the bank’s system.
The scam was exposed when the three diamond firms approached PNB for obtaining
bank credit to import stones from overseas. In 2018, when the three firms
approached PNB for bank credit through LOU, the bank’s official in charge
requested a 100% cash margin because these firms had no pre-sanctioned limit.
The diamond firms challenged the bank’s demand, claiming that they had
previously used this facility. The branch documents, however, revealed no
evidence of such facility being provided to the aforementioned firms. This
triggered an alarm, prompting the bank to conduct an internal investigation into
past bank credits.
The internal investigation found that two banks had previously fraudulently
given LOU to the aforementioned firms without following the proper process.
These LOUs were then transmitted via the Swift upon which credit was granted to
the aforementioned firms.
Yes Bank Scam
Fraud caused the surprising and abrupt fall of a private bank that was emerging
as a strong competitor to other private banks. The bank had a distinct business
model with special focus on retail loans, technology and branch network.
Rana Kapoor, the bank’s promoter, had developed contacts with top industrialists
in the country and created an impressive reputation in the industry in a short
period of time. The majority of key decisions, including large loans, were
centralized in his hands. In 2020, Yes bank faced a tough time. On 5th March
2020, the RBI placed a 30-day moratorium on Yes bank, superseding the private
sector lender board and appointing Prashant Kumar as administrator and overall
the management was taken over by the RBI.
Additionally, it was announced
that SBI will buy 49% stake in Yes bank.
Following are the reasons that led to
- Huge amount of loans:
Book of accounts of Yes bank showed a loan of
55,633 crores and a deposit of 74,192 crores on 31st March 2014. Since then loan
growth has been rapid reaching 2.25 trillion on 30th September, 2019.
- Bad loans:
The bank’s asset quality also deteriorated. As per global
financial firm UBS, Yes bank was providing stressed loans to companies that were
unable to repay the loan on time. Yes bank took a significant risk. Such loans
are referred as bad loans. These companies were DHFL, Reliance, Essel group etc.
It had loans more than its net worth. “The bad loans of Yes Bank are estimated
to be around Rs.40000 crores (Gross NPA). While the Gross NPA was around 19% of
advances, Net NPA was around 6% of loans at the end of December 2019.”
- Large number of withdrawals:
Although the loan sum was increasing at a
high rate, withdrawals were increasing too. The bank experienced consistent
withdrawals because of burden on the balance sheet and the bank eventually
- Financial Position:
In 2018, Yes bank’s share price was Rs 400 but on
6th March 2020 it was Rs. 16.60. The financial situation worsened as a result of
its failure to raise capital to address loan losses.
- Lack of proper governance:
It has dealt with number of governance
challenges that have contributed to the crisis. Uttam Prakash, an independent
director, resigned from Yes bank in January 2020 citing the bank’s deteriorating
In the coming years, the Indian financial system will expand not only in size
but also in complexity as competitive forces gain traction and financial markets
deepen. Banks, as a major component of the financial sector and the country’s
payment system, must be handled as effectively as possible. It is vital to
tighten the corporate governance in banks which is in larger interest not only
beneficial for national economy but also for the global economy.
To conclude, it can be said that the ethical issues in Indian banks are
improving these days, especially in the loan department and government
intervention is needed to solve these issues so that the customer can take
advantage of the benefits offered by the government schemes, which can also aid
in the overall growth and development of the individual, state and economy.
Unethical marketing practices and behaviors cause customers to have negative
outlook of financial services which is bad for the health of any financial
system. Establishment of statutory body which can handle all of these issues is
the need of the hour. Since financial services are complex, the government
should take some steps to increase consumer awareness and education with a focus
on financial services.
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accessed on 3 May 2021
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scam accessed on 3 May 2021
- Aarushi Prabhakar, National Law University Odisha
- Aayush Akar, National Law University Odisha