Introduction:

1. Organization/industry and the ethical dilemma (CSR Practices)

2. You perspective around the ethical issue (CSR).
3. Please link the issue with the theories discussed in the class.

Banking sector plays a vital role in developing an economy by facilitating trade and creation
of new capital. It facilitates the growth process in the economy. Unethical practices followed
in banking sector can cause an entire economy to fall into crisis.

According to a report by RBI a total of 71,500 crore worth of fraud is detected in banking
sector in Financial year 2018-2019. 90% of this loses were from Government owned banks.

Recently, we have witnessed scams which involved thousands of crores loan as a default. The
Ministry of External Affairs said that 31 were accused in fraud while economic offenses have
fled the country entirely. The one by Nirav Modi, Rana Kapoor with PNB and YES Bank
respectively stands the tallest. Lack of ethics in governance caused this scam, not only at a
single stage but at multiple levels. The ethical practice has been majorly compromised.
According to the report provided by Ministry of Affairs, the CBI Department and the
Enforcement Directorate are dealing with 15 major cases of loots which comprise a total
scams worth ₹40,000 crores to both public and private banks. In 2019-2020 till date, the total
scam is up to ₹73,375 crores, which is worrisome.

Why we choose Banking sector:

When bank scam happens the most adversaries are the stakeholders. The stakeholders are
mostly the common men of our society. They had put their money thinking that their money
is safe and government also promotes saving money in banks, the recent case of
demonetisation and Jan Dhana yojana bringing all the informal and private savings into the
banking/formal sector. But these innocent peoples are suffering due to the frequent scams
happening in banking sector (Co-operative bank of Maharashtra, YES Bank, PNB, etc.).
They are unable to withdraw their hard-earned money in the time of need and neither
government nor RBI are helping them out. The poor is suffering due to the unethical practices
of the greedy rich. This is a major concern now. Increasing rate of scams and the important
function of banking sector in an economy gave us a compelling reason to pick this sector. A
detailed analysis will be carried out.

Definition Fraud/Scam:
As per the Association of Certified Fraud Examiners (ACFE), Scam is “a deception or
misrepresentation that an individual or entity makes knowing that misrepresentation could
result in some unauthorised benefit to the individual or to the entity or some other party”.
Under section 17 of the Indian contract act, 1872, consists any of following actions carried by
a party to contract, or with his participation, or by any agent of him, with intending to deceive
another party or it’s agent, or to persuade him to entering the contract:
 The suggestion as a fact, of that which is not true, by one who does not believe it to be
true.
 The active concealment of a fact by one having knowledge or belief of the fact.
 A promise made without any intention of performing it.
 Any other act fitted to deceive.
 Any such act or omission as the law specially declares to be maintained manually.

Classification of Scams:

 Misappropriation and criminal breach of trust.

 Fraudulent encashments through forged documents, manipulation of book of accounts, or
through frivolous documents and conversion of property.
 Undue credit facility provided for undue or for illegal gratification.
 Negligence, or cash shortage.
 Cheating and forgery.
 Foreign exchange transaction irregularities.
 Any other scams not mentioned in above.

Who can make Bank Scams:

 An employee of bank.
 An employee in collusion with outside.
 An outsider:
 Frauds by well-planned fraudsters by exploiting the loopholes in the system.
 Frauds by the influential people in the society 
 Frauds through collusion between the insiders and the fraudsters 
• Will full defaulters
Ethical dilemmas in banking sector:

1. Should banks instead of pursuing only financial gains, also pursue financial, social and
environmental sustainability?

2. Should banks invest in arms industries, and industries that pollute the environment,
and exploit children, or invests in societal and environmental wellbeing initiatives?

3. Should decisions be made only taking into account of stockholders, or stakeholders?

 4. Should banks provide loans to those whoever has a guarantor/ collateral, or provide
loans to needy and initiators those wants to alleviate people’s suffering?

5. Should there be opportunity for people so, that they can decide where their money may
be invested?

6. Should the investment funds be rewarded to companies that show social responsibility,
or to them who don’t show social responsibility?
7. While the interest rate of the bank goes down, banks attract new customers by
promising lower rates, but refuse to give the same benefits to existing customers.
Should banks reduce the interest rate of existing customers?
8. When the policy rate goes up, the banks are quick in raising their loan rates; but when
the policy rate goes down, the banks are slow in cutting rates. Should banks also
reduce the policy rate immediately?
9. While accepting deposits there is no such contract of returning the whole money,
where as in case of providing loans there is strict contract, collaterals. Should banks
also provide collateral while accepting money?

Characteristics between Conventional vs Ethical banking:

Conventional banking system Ethical banking system

Pursue financial gains Pursue financial, social and environmental
sustainability
Cares arms industries, and industries that Invests in society and environment
pollute the environment, and exploit wellbeing initiatives
children
Provide loans to those whoever has a Provide loans to needy and initiators those
guarantor or collateral wants to alleviate people’s suffering
The interest of stockholders is the main aimInterest of stakeholders should be the main
in decision making aim of decision making
Designed for the wealthy those who have Should be designed for the needy and them
minimum care what and where it is used for whom it will be used for worthy causes
There is no opportunity for depositor to There must be opportunity for people so,
choose where their money is being invested that they can decide where their money may
be invested
There is no information about what they did There should be information about all
with the depositors’ money projects and investments that depositors’
money is used for
Its investment funds reward companies even Its investment funds reward companies that
if they act irresponsibly show social responsibility
 Causes of unethical behaviour in banking sector:
1) Conflict of interest:
2) Insider abuse
3) Greed:
4) Lack of transparency and accountability:
5) Poor management information:
6) Mis use of information
7) Excessively generous performance bonus payments:
8) Non independent internal audit department:
9) Non independent external auditors:
10) Lack of clear moral direction from seniors:
11) Excessively complex organizational structure:
12) Offer and Acceptance of Gratification

Stakeholders perspective towards the ethical issues:

The major stake holders are the customers/ or the deposit account holders of the bank,
those constitute the majority of stake holders. The stakeholder theory better explains it.

The Stakeholder Theory Model:

The concept of stakeholders is of undeniable importance: corporations have stakeholders
and their effective management is essential for achieving corporate success.
Ethical behaviours in banking business practices lead to success in banking business, and
the stable banking system. Stakeholder theory attempts to address the question “what is
the purpose of corporation of the banks, and in whose interest should it be run?”
According to Thomas Donaldson and Lee E. Preston stake holder theory has three uses:
descriptive, instrumental and normative.
Descriptive theory: Used as a description to of corporation that enables us to understand
the corporation better.
Instrumental theory: Used instrumentally as a tool for managers. As the profit for
shareholders is the main aim of corporation, but it doesn’t hold good for the day to day
conduct of business. Managers who handles stakeholders better may actually leads to
greater profit as at the end of the day as they are the investors in the business system. It
also suggests that “the long-term success and survival of a business is dependent on the
 ability of the business to establish and maintain relationship between entire network of
stakeholders.
Normative theory: Used as normative account of how business houses ought to serve
their various stakeholders. As Donaldson and Preston suggests, “the interest of all
stakeholders is of intrinsic value.” The central claim of normative stakeholder theory is
that enterprises must be operated for the benefit of different stakeholder groups from
employees, customers, suppliers, and the local community.

 Systems Theory Model

The regulator in a financial system must first be ethical in
character and action in order to exercise its mandate as a
banking ombudsman. Closely related to the stakeholder theory of
business ethics is the systems theory approach. As an ethical
theory, systems theory also attempts to connect business and
ethics (Nilsson and Westerberg, 1997). According to the systems
theory ethicists, social phenomena cannot be fully understood in
isolation. Rather they must be viewed as parts of the larger
system within which they interact with other elements of the
system that is, within the systems theory framework, the
optimization of the goals of individual components (subsystem
goals) is to be pursued only to the extent compatible with the
pursuit of overall system goals. For Ackoff (1987), ethical
judgment should be based not on rules that are to be applied to
the outcomes of decisions or end product, but to the decision-
making process involving stakeholders‟. That is to say, the
actions of a part of the system could have consequences on the
rest of the system, as such the system in its essence or in search
of its ultimate goal will constantly seek to balance itself or
maintain equilibrium. As such, it can be said that the system
theory places emphasis on maintaining balance of the overall
system and that subsystem interests are subordinate to the
overall system interests.

From the above discussions of stakeholder theory, it is clear that the stakeholder theory
suggests that earning profits for the business and its shareholders, along with gratifying other
duties to other associated groups with the firm are the core for which it exists.

Feeling of stake holders after banking scams:

1. Business houses are looting banks, so banks are looting them
2. Business houses are not worrying about forfeiting loans as banks are not worried
about it as they are colluded with these scamsters and looters.
3. Stake holders rescues themselves from depositing in bank as they feel their money is
not safe in banks.
4. Perceived outcome of all are frauds.
2. How the ethical dilemma was/ will be resolved?
The Basic Ethical Principles in Banking are:
1. Principle of Mutual Trust
2. Principle of Mutual Benefit and Interest
3. Principle of Good Intentions
4. Principle of Conflict Between One's Own Interests
5. Principle of equal opportunity

6. Regulation, Supervision and Surveillance

7. Contraventions, Sanctions and Penalties
8. Internal Controls
 Current structure for filing Police/CBI complaint; defined by
RBI:

Category of bank Amount involved in Agency to which Other information

fraud complain to be
lodged
Private sector or Rs. 1 lac and above State police
foreign banks
Rs. 10000 and above State police
committed by
employee
Rs. 1 crore and Senior fraud In addition to state
above investigation office police
(ministry of
corporate affairs)
Public sector banks Below Rs. 3 crores State police Anti-corruption
wing of CBI (where
internal employee is
the prima facia
evidence)
Economic offences
wing of CBI (where
staff involvement is
not prima facia
evident)
Rs. 3 crore and CBI Banking security
above but less than and fraud cell of
25 crores CBI
More than 25 crores CBI
 CONCLUSION
 The outcomes from our study:
 The frauds are increasing year on year as 31% increase from 2018-2019 in year 2019-
2020 till date and the amount tangled in scams are increasing with respect to the
number of scams.
 Majority of scams are due to the default in loan repayment, which is a matter of
concern.
 The NPA and advance ratio is in rising trend.
 Major default was due to the asset quality rather than service quality (Bhushan, Essar,
Gitanjali jewellers.)
 Due to scams non-performing assets are increasing in banking sector.
 Profitability of banks are steadily decreasing, so sustainability of banks is under
question mark.
  The main reason for all is due to the scams in banking sector.

Functions of Banks

Primary or
General Utility
Agency Functions Traditional
Functions
Functions

Accepting Deposits
2. Receiving 2. Arrangement of
1. Security of
Advancing of Loans Payment for Travellers cheques
Wealth and Assets
customers and letter of credit

3. Payment on 3. Information
1. Fixed Deposits
1. Cash Credit behalf of 4. Financial Adviser relating to
Account
customers Economic Position

2. Loans and 4. Transfer of 5. Publication of

2. Current Account 6. Accepting of Bills
Advances money Information

5.Purchase and
3. Saving Account 3. Overdraft sale of shares of 8. Personal credit 7. Security of loans
securities

6. Function of
4. Home Safe 4. Discounting of 10. Share market 9. Management of
manager, Trustee
Account Bills function Public Debt
and Executor

11. Management
7. Underwriting
5. Indefinite Period of Foreign
Functions
Exchange

6. Deposits
8. Other Functions
Account

1. Payment of
7. Other Deposits
cheques, bills and
Account
letters of credit.
 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 technology to 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 and compassionately.
* Arrange for requisite employee training.
* Ensure non-discrimination in personnel practices and support employees' and their family
members' access to basic health, education and housing needs.
* Finance activities which contribute to environmental protection, employment creation, poverty
alleviation and women's empowerment.
* Devise innovative products without assumption of undue risk.
* Arrange flexible mortgage payments 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 prove you don't need
it.”
* Don't reschedule loans at the last moment to enable powerful, but delinquent borrowers to
participate in elections.
* Don't permit sexual discrimination with respect to depositors, borrowers and employees.
* Don't be lavish in branch decorations and perks for Board Members and senior management
personnel.
* Don't engage in unhealthy competition to steal qualified employees or wean away depositors from
other banks.
* Don't engage in collusive interest rate fixing.
* Don't finance activities which aggravate pollution, employ child labour and injure human health.
* Don't finance unsustainable bubble in real estate or stock prices.
* Don't bow down to illegitimate pressures exerted by political personalities, bureaucrats or
musclemen.
* Don't appoint pliable auditors to prepare opaque, non-transparent financial reports.
* Don't be an accomplice to money-laundering activities or illicit trade.

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