Ethics for banking sector

ethics in banking is of supreme importance for the economyand the society. In my judgment, ethics in bankingmust be firmly anchored onfour pillars. First, banks must comply with all laws, rules and regulations that are usually framed in any country to ensure soundness of operations and to enhance confidence of the society. These laws, rules and regulations may relate to, among others, capital adequacy, maximum shareholding by members of a family, qualifications and tenure of members of the Board of Directors and Managing Directors, representation of depositorson the Boards, credit rating requirements, maximum limits on single party exposure, liquidity and credit/deposit ratios etc. Banks are additionally subject to provisions of company law, tax laws and securities laws. Any attempt to circumvent any legal provisions must be considered unethical. The universe of law and the universe of ethics are not necessarily coterminous, butviolation of law is rarely, if ever, ethical. Second, banks must ensure fair and equitable treatmentof all stakeholders. The interests of various stakeholders such as shareholders, depositors, borrowers and employees do not necessarily coincide. For example, banks may be inclined towards offering low returns to depositors and charging high interest rates from the borrowers in order to maximize profits and dividend for the shareholders. Such conflict of interest must be ethically balanced keeping in view the greatest good of the greatest number. Third, the banks must ensure full, truthful and transparent disclosure of their financial health. As noted before, many of the assets which turned out to be toxic were treated as off-balance sheet items. Theconcerned stakeholders were thus deprived of the right to get a transparent picture of the true financial health and the risks that were being assumed. Fourth, banks must behave as socially responsible corporate citizens. Milton Friedman, a nobel-laureate economist and an ardent proponent of free market economy wrote in 1970 thatthere is one and only one social responsibility of business to use its resourcesand engage in activities designed to increase its profit so long as it stays within the rules of the game. One may interpret this statement to mean that business is simply about maximizing profit without violating laws and regulations. This is obviously an untenable position. It may be observed here that banks did not apparently violate any prevailing laws and regulations, yet their activities inflicted severe negative externalities upon the society, as noted earlier.In this context, it may be mentioned that many of ourcorporate entities, includingbanks, gloat with satisfactionabout fulfillment of social responsibility by offering a few scholarships, making donation to some clinics or offering some support for some charitable activities. While such initiatives are welcome, these touch only the fringe. Social responsibility must be viewed from a wider perspective, taking into account the impact of banks' activities on growth, employment and emphatically in our case, poverty alleviation as well. With the above hindsight, I would suggest a few do's and don'ts for banks to meet ethical standards. This list is by no means exhaustive. Do's: * Ensure a fair return to the depositors and safety of deposits. * Minimize spread between cost of funds and lending rates. * Engage in transparent accounting practices. * Comply with all laws, rules and regulations promulgated by relevant regulatory authorities. * Develop effective risk management systems. * Treat clients with courtesy. * Offer services promptly. * Make proper use of information and communications technologyto enhance efficiency in providing services. * Protect minority shareholders' interest. * Set up management systems which clearly specify the functions of the Board, key management personnel such as the Managing Director, Chief Financial Officer, Company Secretary, Heads of Divisions and Departments etc. * Treat employees fairly andcompassionately. * Arrange for requisite employee training. * Ensure non-discriminationin personnel practices and support employees' and their family members' access to basic health, education and housing needs. * Finance activities which contribute to environmentalprotection, employment creation, poverty alleviation and women's empowerment. * Devise innovative products without assumption of undue risk. * Arrange flexible mortgagepayments for poor people's housing. * Try to expand operations to unbanked or underbanked sectors, regions and population groups. * Emphasize recovery, but with a human face. * Develop an internal code of ethics and set up an institutional arrangement to monitor compliance and suggest remedial actions, where needed. Don'ts: * Don't prove Mark Twain's statement “banks will lend you money if you can proveyou don't need it.”