Ethics, Business Ethics & Banking: An Integrated Perspective | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE D: ETHICS IN BANKS AND FINANCIAL INSTITUTIONS

Ethics, Business Ethics & Banking: An Integrated Perspective

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1. Values and Ethics

Values are the guiding principles or standards of behavior that are regarded as desirable, important, and held in high esteem by a particular society. Ethics is the system of moral principles that governs the behavior of individuals or groups.

Example: Honesty, integrity, and transparency are values. Not manipulating financial statements is an ethical behavior in accounting.

2. Ethics and Business Values

Business values are the principles that guide how a company conducts business. These include customer focus, accountability, innovation, and fairness. Ethics in business ensures these values are upheld in daily operations.

3. Business Ethics – Definition, Principles and Practice

Definition: Business ethics refers to the application of ethical values in business behavior. It encompasses a company’s conduct in its dealings with stakeholders.

Principles: Integrity, Fairness, Transparency, Accountability.

Practice: Creating codes of conduct, establishing ethical committees, and whistleblower policies.

4. An Ethical Crisis: Is Business Ethics an Oxymoron?

When profit motives override ethical considerations, businesses face ethical crises. Some argue that 'business ethics' is a contradiction because profit and ethics often conflict. However, long-term sustainability demands ethical behavior.

5. Ethical Foundation of Banking: Finance Depends on Trust

Banking operates primarily on trust. Deposit holders trust banks with their money. Any breach, such as a financial scam or fraud, erodes this trust and can collapse financial systems.

Mathematical Illustration:

    Let T = Level of Trust
    Let R = Rate of Return
    If Trust decreases → Customer withdrawals ↑ → Liquidity ↓
    Hence, Profitability P = f(T), where f is a positive function
    

6. Ethical Foundation of Being a Professional

A professional must follow ethical standards like competence, confidentiality, responsibility, and integrity. In banking, this includes ethical lending, honest reporting, and avoiding conflict of interest.

7. Banking Ethics in Global Context: Enron and Its Lesson

Enron's collapse was due to unethical accounting practices (off-book financing, hiding debt) facilitated by its auditor Arthur Andersen. Lesson: Lack of ethics can destroy even the largest corporations.

8. Global Financial Crisis

The 2007–08 financial crisis was caused by unethical lending (subprime mortgages), lack of transparency, and over-leveraging. It underscored the need for ethical governance in finance.

9. Ethics in Indian Context: Satyam and Its Lessons

Satyam Computer Services inflated revenue and profits for years. When exposed, it shattered investor confidence and led to regulatory reforms like stronger corporate governance and oversight.

10. An Indian Bank Case Study

Case: The PNB-Nirav Modi fraud involved fraudulent LoUs (Letters of Undertaking) worth over ₹13,000 crores. Lapses in internal checks and collusion among employees reflected a deep ethical failure.

Lesson: Need for ethical training, better internal controls, and a culture of accountability in banking.

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Multiple Choice Questions (MCQs)

1. What does "business ethics" primarily deal with?
   a) Legal rules
   b) Profit maximization
   c) Moral principles in business conduct
   d) Customer segmentation
   Answer: c
2. What is the key lesson from the Enron scandal?
   a) Always expand internationally
   b) Profit is everything
   c) Ethical lapses can destroy companies
   d) Increase leverage
   Answer: c
3. Which Indian corporate fraud highlighted the importance of strong auditing?
   a) Reliance
   b) Infosys
   c) Satyam
   d) TCS
   Answer: c
4. What is the foundation of banking ethics?
   a) Competition
   b) Trust
   c) Regulation
   d) Innovation
   Answer: b
5. The Global Financial Crisis was caused by which unethical practice?
   a) Over-regulation
   b) Subprime lending
   c) Gold hoarding
   d) Ethical auditing
   Answer: b
6. Values are:
   a) Government rules
   b) Mathematical principles
   c) Guiding beliefs for ethical behavior
   d) Marketing strategies
   Answer: c
7. What does a lack of ethical practices in banking primarily result in?
   a) Employee bonus
   b) Customer trust and satisfaction
   c) Loss of trust and financial instability
   d) Regulatory growth
   Answer: c
8. The principle of integrity in business ethics means:
   a) Cutting costs
   b) Honest and strong moral principles
   c) Competitive advantage
   d) None of the above
   Answer: b
9. Who was the auditor of Enron?
   a) Deloitte
   b) KPMG
   c) Arthur Andersen
   d) EY
   Answer: c
10. What type of fraud was involved in the PNB case?
    a) Loan write-off
    b) Credit card fraud
    c) Letter of Undertaking fraud
    d) Demonetization scam
    Answer: c