Ethics and Governance in Banks in India

Banking reforms should target ethics and governance

Dr B Yerram Raju  and  Vikas Singh
02 May 2017 14  

The Reserve Bank of India (RBI) has put four banks on its critical watch list and warned another ten to spruce up their capital. What prompted the RBI to do this is anybody’s guess. Both the warning and action are sorely needed.

Huge bank frauds are reported, many of them from public sector banks (PSBs). An analysis of both frauds and the increasing non-performing assets (NPAs) suggests that the attention of banks to their basic functions of deposit and credit has diminished in the wake of their search for non-banking products like mutual funds and insurance, which offer hefty commissions to all cadres of officers. 

Neither the PJ Nayak Committee’s suggested governance reforms, leading to the setting up of the Bank Board Bureau (BBB) for selection of directors and chairpersons, nor Indra Dhanush seem to have improved the governance of banks. There is deep erosion in values and governance, in PSBs in particular and the Indian financial system in general.

The remarks of the audit and risk management committees of the boards, on board-sanctioned advances, which are unavailable to the public, seem to have been negative. The external forensic audit of banks, which is done for defaulting companies, is given a miss for board sanctions.

In the context of the massive NPA restructuring policy hinted at the recently held meeting of bankers with the Finance Minister, the governance of banks would need to be critically looked at. Most PSBs have a Chairman-Managing Director (CMD) or Managing Director (MD)-directed Boards. 

The following questions demand an answer.

Cannot each of the board members be directed to provide a statement of purpose of their presence on the Board and the way they would like to accomplish the purpose? Second, cannot they be asked to provide the time they would devote for the issues and concerns of the bank? Can the Board of Bank Supervision review the annual performance of the directors within the ambit of such statements by the directors? Can the BBB look at the value systems and insist that there must be ethics committees constituted by each bank board to govern ethics?

Ethics and Bottom Line 

The question that haunts everybody contextually is: Can business ethics and bottom line co-exist?

Let us answer some real questions. Who is blamed if corporate governance goes wrong and why do we change the goalposts? A few other relevant and contextual aspects relate to protecting business ethics and methods to balance the interests of different stakeholders. We also need to ask how we address the ethical and governance issues of large investors and owner’s interest.

Maryann Bruce, former president of Wachovia's Evergreen Investment Services, said banks are often dominated by a message from the top: "Do as I say." 

“There's a culture of groupthink, there's a culture of 'Don't speak out unless you have a few other people who agree with your opinion’,” she said. "You always like to believe that people have integrity, but it takes courage." 

The questionable means adopted by banks to make a quick buck often leads to disastrous consequences. The means rather than the ends are important, in the words of Swami Vivekananda. It takes years to build a reputation, but only a few minutes to tarnish it.

The business landscape can create a win-win situation provided there is a value in the form of trust in the supplier-customer-employee relationship. 

The banking industry became a big profit centre in itself, not just a tool for moving money through the economy. The rewards are too big, too fast and too seductive, many industry insiders agree. 

Profit is a means but not an end and the business wins not by making money from the society but by making money for it. A business model has to align itself with values that drive all the stakeholders, from the shareholders to the workers.

Pope Benedict XVI, in his June 2009 "Charity in Truth" encyclical, noted the misuse of financial methods that "wreaked such havoc on the real economy." He added, "Financiers must rediscover the genuinely ethical foundation of their activity, so as not to abuse the sophisticated instruments which can serve to betray the interests of savers." 

Corporate Governance sans Business Ethics is a Farce

Sans business ethics, corporate governance would run the very risk of becoming a bloodless and ghostly apparition, far removed from its original condition of robust well being. Sometimes investors (as do some boards) do not bother about the dilution of business ethics because of a short-term outlook. Reputation, norms and low employee turnover (not relevant in the case of the PSBs) all impact business ethics and have a substantial influence on the bottom line.

Gold standard and the Value-led Approach 

In the final analysis, corporate’ reputation depends on dogged adherence to core values. Bottom line growth and business ethics co-exist in the long-run.

Alan Greenspan once said, “The creation, maintenance and distribution of wealth are handled by one group, while the provision of capital is done by another”. This seems very relevant to our PSBs.

Corporate Governance as per Vedic principles lies in ensuring Lok Sangraham (greatest possible good to all); creation of wealth through competence (Kaushalam) and productivity (Utpadakata); Swatantrata (autonomy and independence in business development); and viswasatha (trusteeship). It is a fond hope that these principles are adhered to in the financial sector. 

An ethical gold standard needs to be framed, followed and exemplified. But who else will bell the value-led approach to corporate governance except the owner, the Government of India?

This contribution is based on Dr B Yerram Raju’s coauthored books: “A Saint in the Board Room” (2011) and “Corporate Governance in Banks and Financial Institutions” (2000).

(Dr B Yerram Raju is an economist and risk management specialist while Dr Vikas Singh is a life coach and consults in the area of leadership & Governance.)

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