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Issue of Ethics in banking sector

Issue of Ethics in banking sector


ü  GS Mains paper II and IV

ü  Ethics, Corporate governance, Transparency, Conflict of Interest, Financial Propriety


  • The recent frauds in the Banking sector have invoked the question of propriety and ethics in the Banking Sector.
  • The PNB fraud by Nirav Modi is a case of Public Sector Banking and ICICI Bank’s CEO- Chanda Kochhar’s involvement in an NPA loan is a matter of ‘conflict of interest’.
  • In both the cases, the common missing factor is the bank regulation and supervision.

Banking is a non-transparent Business:

  • Banking is a non-transparent business. Depositors do not know how their money is being invested.
  • Loans are normally given on the basis of the bank management’s judgement.
  • The management assesses the health of a company and its business plans and on the basis of that, decides whether to give the company a loan or not.
  • Regulation and supervision of banks have the objective of protecting bank consumers, reducing the risk of bank failure and limiting the systemic risk arising from the bank’s operations to the financial system as a whole.
  • Because of its non-transparency and huge financial implications for a large number of stakeholders, it is necessary to discuss the role of Bank Regulators, Supervisors and Management.

What should have been done in order to avoid these two cases?

  • Timely supervision and regulation:
    • The RBI has failed to spot stressed assets in time and created a huge burden for the tax payer.
    • The banking supervisor had allowed banks to hide bad news and permitted them to continue ever-greening loans; this led to rising NPAs.
    • In December 2017, gross NPAs in the Indian banking sector stood at Rs 8.4 lakh crore.
    • This crisis alone brought a recapitalisation bill of Rs 2.11 trillion to the taxpayer. The
    • NPA figures and the recapitalisation needed are likely to grow.
  • Lack of Integration between CBS and SWIFT:
    • The PNB-Nirav Modi case and the ICICI conflict of interest case suggest further weaknesses in bank supervision.
    • The ICICI case revolves around a loan given to Videocon from whose promoter an immediate family member of Kochhar may have benefited.
    • The CEO was part of the committee that made the decision to give the loan.
    • The loan was one in which there could have been a possible conflict of interest.
    • It subsequently turned into a non-performing one.
    • There is a clear-cut lack of integration between the CBS (Core Banking Solution) and SWIFT (Society for Worldwide Interbank Financial Telecommunication), the system through which money was transferred abroad for Nirav Modi.
  • Quick action should have been taken by the supervisor:
    • The bank supervisor appeared to have been inadequately apprised of the magnitude of the damage that this lacuna could bring upon the bank.
    • It did not promptly see the problem when it occurred and that allowed the beneficiaries to milk the system for many years before they were brought to book.
    • Both cases appear to have festered for many years before the CBI or the ED stepped in.
  • Role of RBI:
    • In the ICICI case, the bank involved is designated by the RBI as a Systemically Important Bank.
    • This means that if the bank gets into trouble, the entire financial system of the country could be jeopardised. This also means that this bank would have received heightened supervision by the banking regulator.
    • Risk-based supervision implies that the RBI has a special framework for Systemically Important Banks and supervisors watch the bank more carefully.


  • The common problem in both the cases is the lack of ‘supervision’ and ‘regulation’.
  • There should be red alerts in the Banking regulatory and supervisory framework, whenever there is a case of ‘Conflict of Interest’ (As in ICICI) or there is lack of integration between the CBS and SWIFT systems.
  • This also calls for putting an end to the demand for privatisation of public sector banks.
  • This is because ICICI, a private bank has also failed to avoid the proble of NPAs.


  1. Critically examine the lacunae in ‘corporate governance’ in Indian Banking system while giving recent examples.




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