BUSINESS ETHICS & VALUES IN BANKING INDUSTRY : BUSINESS ETHICS & VALUES IN BANKING INDUSTRY Prof: R.K.GUPTA
B.COM (Hons); CAIIB; AIB (London); LL.B(I) BASIC OBJECTIVES OF MANAGEMENT : 8/15/2010 2 BASIC OBJECTIVES OF MANAGEMENT Peter Drucker, one of the guru of modern management says there are three basic objectives of modern management:
But he is disturbed with the only objective of materialistic achievements by hook or by crook, and therefore concerned for human values and ethics which we call spiritualism.
What has happened in USA in 1980’s –hire & fire
How this is balanced is the Major question of today. ETHICAL Foundation : 8/15/2010 3 ETHICAL Foundation Seven Puzzle Pieces to a Solid Personal
Tone at the Top
Long lasting Seven Laws of the Harvest : 8/15/2010 4 Seven Laws of the Harvest We reap only what we sow.
We reap the same kind as we sow.
We reap in a different season than we sow.
We reap more than we sow.
We reap in proportion to what we sow.
We reap a full harvest only if we persevere.
We cannot do anything about last year’s harvest, but we can do something about this year’s harvest. Definition of Ethics : 8/15/2010 5 Definition of Ethics Derived from the Greek word “ethos”, which means “custom”, “habit”, and “way of living”
Definition: “the discipline and practice of applying value to human behavior, resulting in meaningful conduct.” CONSTITUENTS OF ETHICS : 8/15/2010 6 CONSTITUENTS OF ETHICS Character
Ethics is the value system to which the civilized society conforms to.
Every body is important and taken care of.
The principal of live and let live with spiritual attitude.
There is no space for misguiding, falsification or moral turpitude. ETHICS & LAW : 8/15/2010 7 ETHICS & LAW To better understand ethics let us understand and contrast the definition of ethics and law
Law is a consistent set of universal rules that are :
generally accepted and
These rules describe the ways in which people are required to act in society.
what is good for the individual and for society and
establishes the nature of duties that people owe to
others in society ETHICS : 8/15/2010 8 ETHICS Reflection in a company’s operations of the values and moral principles used in the communities in which they operate
Successful markets and corporate performance are founded on a commitment to basic ethical principles aligned as much as possible to the interests of individuals, corporations and society. ETHICS : 8/15/2010 9 ETHICS Ethical standards may be expressed in a company’s formal conduct requirements, or contained in generally stated principles that guide a company’s preferred conduct or behavior.
Most companies have put in place a code of ethics for its employees to conduct themselves in a particular manner while doing business.
In Banking Industry code of ethics has been implemented for employees through:
Bipartite settlement ETHICS FOR THE MANAGEMENT : 8/15/2010 10 ETHICS FOR THE MANAGEMENT For the Management, Standard and Ethics in banking industry have been directed by the regulator through FAIR PRACTICE CODE through DISCLOSURES OF:
Rate of interest on deposit and advances
Salient features of lending schemes
Display of notice board for vigilance, compliance officer, officer dealing in deficiencies in customer services complaint etc
Charter of customer’s right PURPOSE OF ETHICS : 8/15/2010 11 PURPOSE OF ETHICS Ethics are the guiding principles.
Where the proposed business activity/ operation of the company borders on the unknown, the company needs to apply the ethics principle to decide on the project.
Ethics help make relationships mutually pleasant and productive- imbibes a sense of community among members- a sense of belongingness to society. RBI----Ethics in Banking Industry : 8/15/2010 12 RBI----Ethics in Banking Industry Circular issued by RBI/2009-10/159 DBS. CO. FRMC. BC. No. 7 /23.04.001/2009-10 September 16, 2009 on:
Fraud Risk Management System in banks – Role of Chairmen / Chief Executive Officers
It starts as:
As you are aware, the incidence of frauds in the banks has been showing an increasing trend over the recent years, both in terms of number of frauds and the amounts involved. It has been observed that the trend is more disquieting in retail segment especially in housing and mortgage loans, credit card dues, internet banking, etc. Moreover, it is a matter of concern that instances of frauds in the traditional areas of banking such as cash credit, export finance, guarantees, letters of credit etc remain unabated WHY HAVE A CODE OF ETHICS : 8/15/2010 13 WHY HAVE A CODE OF ETHICS To define acceptable behavior
To promote high standards of practice
To provide a benchmark for self-evaluation
To establish a framework for professional behavior and responsibilities
As a vehicle for occupational identity
As a mark of occupational maturity. ETHICS- TRANSITION : 8/15/2010 14 ETHICS- TRANSITION Creating the Ethical Imperative : 8/15/2010 15 Creating the Ethical Imperative Written code of ethics
Resolution process – conflict management NEED OF ETHICS IN GOVERNANCE : 8/15/2010 16 NEED OF ETHICS IN GOVERNANCE In fact Corporate governance with ethics goes far beyond company law or Banking law or any other Laws .
The quantity , quality and frequency of financial and managerial disclosures,
Extent to which the BOD exercise their fiduciary responsibilities towards share holders, and
Commitment to run transparent companies that
maximize long term shareholder value
Create confidence in the minds of all the stake holders like
SOCIETY AT LARGE
ALL THESE CANNOT BE LEGISLATED AT ANY LEVEL AS ETHICS PLAYS A VITAL ROLE. TEN ETHICS BY COMPUTER ETHICS OF INSTITUTE : 8/15/2010 17 TEN ETHICS BY COMPUTER ETHICS OF INSTITUTE 1) You shall not use a computer to harm other people.
2) You shall not interfere with other people's computer work.
3) You shall not snoop around in other people's files.
4) You shall not use a computer to steal.
5) You shall not use a computer to bear false witness.
6) You shall not use or copy software for which you have not paid.
7) you shall not use other people's computer resources without authorization.
8) you shall not appropriate other people's intellectual output.
9) You shall think about the social consequences of the program you write.
10) You shall use a computer in ways that show consideration and respect. ETHICS : 8/15/2010 18 ETHICS THROUGHOUT THE AGES
MAN HAS STRUGGLED WITH
THE SUBJECT OF RIGHT & WRONG, ETHICS & JUSTICE Types of Right v. Right Dilemmas : 8/15/2010 19 Types of Right v. Right Dilemmas Truth v. Loyalty
Individual v. Community
Short-Term v. Long-Term
Justice v. Mercy
It’s right to tell the truth, but it is also right to be kind and considerate of peoples’ feelings and emotions.
It’s right to apply rules and procedures equally, without favoritism, but it is also right to give special treatment to hard-working, dependable, and productive employees. Examples of Right v. Right Dilemmas (cont’d) : 8/15/2010 20 Examples of Right v. Right Dilemmas (cont’d) It’s right to spend more time adding more quality to your work but it is also right to meet deadlines and avoid “diminishing returns” on your efforts.
It’s right to be concerned about short-term results, but it is also right to focus on long-term growth and stability.
It’s right not to share information given to you in confidence, but it is also right to report violations of laws, rules, and ethical standards. Golden Rule of Ethics : 8/15/2010 21 Golden Rule of Ethics The following are the forms of the golden rule in ethics. Each of these forms the basis of all human values. These are the core values to change one first.
1. Everything you want others to do to you, you shall do to others.
2. Do not do to others that which you do not wish them to do to you.
3. Do not do anything to others that if done to you, would cause harm to you. DEFINITION OF VALUES : 8/15/2010 22 DEFINITION OF VALUES A broad definition of values, derived from an insight into ancient India’s psycho philosophical wisdom literature is:
“Values are states of feelings/emotions that underpin the content of a choice/ decision and determine the manner of using the intellect/ reason for justifying and implementing that choice/decision.”
Character is the foundation of values. SEQUENCE OF VALUES : 8/15/2010 23 SEQUENCE OF VALUES Human Values make a person Antarmukhi (interiorized) while skills will make him more and more Bahirmukhi (exteriorized). Human values transcend moral, ethical and spiritual values. HOW THE ETHICS AND VALUES ARE DILUTED : 8/15/2010 24 HOW THE ETHICS AND VALUES ARE DILUTED WAY OF CREATING A GREED, THIRST, LUST
WAY OF CREATING TRUST
POLITENESS WITH RATIONAL
SYSTEM AND PROCEDURES
BANK GUARANTEE RELATION IN FINANCIAL ACCOUNTING STANDARDS AND CORPROATE GOVERNANCE : 8/15/2010 25 RELATION IN FINANCIAL ACCOUNTING STANDARDS AND CORPROATE GOVERNANCE Ribbon Blue Committee Reports on improving the effectiveness of audit committee says
“ If a corporation is to be viable attraction for capital, its board must ensure disclosure and transparency concerning Company’s financial performance as well as its governance practices.” Need for Ethics in Accounting : 8/15/2010 26 Need for Ethics in Accounting No body except the promoters and/ or say Executives Officers are involved directly in the management of the company but in banking company the employees at large are executors where ethics plays a vital role.
The information must reach to all concerns present and prospective stake holders so that they may be aware of the present financial position of the company solely for the purpose of continuing or take out their investment to some other better opportunity. (Disclosure of vigilance functioning) NEED FOR ETHICS IN ACCOUNTING-2 : 8/15/2010 27 NEED FOR ETHICS IN ACCOUNTING-2 Changes in world economy during last 3 decades:
Unification of east and west Germany in 1990
Transformation of East European “Iron curtain” economies into open economies
Disintegration of USSR
Formation of World Trade Organization (WTO).
Lowering the Bamboo curtain and gradual integration of China’s economy with the rest of the world
Formation of west European economic zone by 11 countries including Germany and France and acceptance of Euro as their common currency. NEED FOR ETHICS IN ACCOUNTING-3 : 8/15/2010 28 NEED FOR ETHICS IN ACCOUNTING-3 Adoption of New Economic Policy (NEP) of deregulation, privatization and globalization by India in 1991.
Opening up of almost all the world economies since 1990s.
Most of the countries have adopted the policy of currency convertibility on current account and many of them are now moving in stages towards capital accounts convertibility
After opening of economies of various countries, there is greater movement of international investment by FIIs.
Keeping in view the above developments, the interest of shareholders and other investor stake holders across the borders of the country have become of vital importance. Hence if the accounts are prepared in accordance with the high standard of ethics, it creates confidence in the mind of the investors. NEED FOR STANDARDIZATION OF ACCOUNTING STANDARDS : 8/15/2010 29 NEED FOR STANDARDIZATION OF ACCOUNTING STANDARDS Few countries framed their policies keeping the
creditors in mind,
need of authorities or central planners.
In US, Accounting Standards have been developed keeping in view the needs of participants in the capital market.
Many complexities came up during last three decades resulting of which a need was felt for international standardization of accounting standards so that:
All information should be based on ethical approach and transparency which may place the view of financial statements in true and fair manner for all concerns.
As such need for inter-country uniformity of accounting standards was felt. NEED FOR STANDARDIZATION OF ACCOUNTING STANDARDS-2 : 8/15/2010 30 NEED FOR STANDARDIZATION OF ACCOUNTING STANDARDS-2 This led to setting up of the International Accounting Standards Committee (IASC), which was later converted into International Accounting Standards Board (IASB) with effect from 1st April 2001. It is the apex body of professional institutes of accountants of various countries.
IASB iron out the variances between various accounting standards which has been set up by the respective countries in isolation so as to come out for a uniform standardization.
High quality accounting standards consists of a comprehensive set of neutral principle that require consistent, comparable, relevant and reliable information that is useful for investors lenders creditors and other who make capital allocation decisions Who are concerned? : 8/15/2010 31 Who are concerned? Share holders including promoters
Investors and creditors
Society at large
Keeping in view the above points regulatory authorities of Government have framed certain rules and regulations which are to be followed in letter and sprit. Main source of financial information : 8/15/2010 32 Main source of financial information Published accounts of the company which should therefore be not only transparent but reflect true and fair view of the financial health of the company also.
This information is submitted in various forms like:
Balance sheet & Profit & Loss Accounts as on 31st of March of every year (u/s 210 (1) of Companies Act 1956 and if deviations, then the reasons thereof should be furnished u/s 211(3b)
Cash flow statement which is mandatory for the listed companies in India under clause no 32 of Listing agreement (SEBI-cir/08/2000 of 04.02.08) should be prepared in accordance with AS 3 of ICAI Various forms for submission of information -2 : 8/15/2010 33 Various forms for submission of information -2 Consolidated financial statements for the listed companies in case there are subsidiaries of such listed companies besides their individual financial statements. ( SEBI—SMRP/POLICY/CIR-44 OF 31.08.2001)
Statutory Audit and filing of the statement is mandatory( Clause 32 of listing agreement)
Board’s Reports shall include a Directors’ responsibility statement confirming that the accounts have been prepared in accordance with the relevant accounting guidelines ( u/s 217 (2AA) of companies Act Various forms for submission of information -3 : 8/15/2010 34 Various forms for submission of information -3 EPS (earning per share data) in accordance with AS 20 of ICAI on or after 01.04.2001. It is mandatory for all listed companies.
Directors responsibility statement - Material information on issues covering all functions of the company and how the interest of the stake holders is protected by the company.
Auditors Reports which confirms for following up of the Indian General Accepted Accounting Principles and Practices (GAAP)
This does not mean that after audit of accounts the management is relieved of its responsibility. The auditors only certify on the basis of information supplied hence safeguarding the assets of the company is the sole responsibility of the management. (Satyam) Meaning of True and Fair view of Financial Statements : 8/15/2010 35 Meaning of True and Fair view of Financial Statements The financial statements are to be prepared strictly in accordance with:
Companies Act and other applicable laws of the land.
Generally Accepted Accounting Principles and Practices (GAAP)
UK and USA GAAP are more stricter as compare to Indian standards on GAAP.
The Indian companies which wants to raise capital in foreign countries are to rewrite their accounts in accordance with the international GAAP Indian Accounting Standards : 8/15/2010 36 Indian Accounting Standards The role of ICAI in framing the accounting standards.
“Financial statements also show the results of stewardship of management, or the accountability of management for the resources entrusted to it. Those users and assessors of the stewardship and accountability of management do so in order that they may make economic decisions. These decisions may include, for example, whether to hold or sell their investment in the enterprises or whether to reappoint or replace the management”
Chairman/CEO and CFO take the responsibility by signing the annual accounts of the company every year. Chairman/ CEO and CFO signs the responsibility statements.
Number of reporting accounting standards set up by ICAI—(28) known as AS-1 TO AS-28 DETAILS OF AS 1 to AS 28 : 8/15/2010 37 DETAILS OF AS 1 to AS 28 DETAILS OF AS 8 to AS 28 : 8/15/2010 38 DETAILS OF AS 8 to AS 28 DETAILS OF AS 15 to AS 28 : 8/15/2010 39 DETAILS OF AS 15 to AS 28 DETAILS OF AS 22 to AS 28 : 8/15/2010 40 DETAILS OF AS 22 to AS 28 ACCOUNTING STANDARDS SCENARIO IN INDIA : 8/15/2010 41 ACCOUNTING STANDARDS SCENARIO IN INDIA After amendment in companies act 1956, amending section 210 it is mandatory on the part of the companies to adhere to the accounting standards set up by the Institute of Chartered accountants of India which has been described hereinabove from AS-1 to AS 28 any deviation to the Indian GAAP, require cogent reasons and proper clarifications
Indian GAAP is though not as stricter as that of US GAAP but still the accounting standards of Indian GAAP are in accordance with the International Accounting Standards Board (IASB) Banking/Financial Institutions : 8/15/2010 42 Banking/Financial Institutions Financial results (Qly-Hy-Yly) in accordance with the guidelines of Companies Act 1956, Banking regulation Act 1949, Disclosures as per SEBI guidelines and Institute of Chartered Accountants of India (ICAI) and following up of AS1-AS28
Concentration of deposits :
20 major accounts largest deposits & %age to total deposit
Concentration of advances :
20 major accounts of largest borrowers & %age to total advances
Total NPA that also sector wise:
Agriculture & allied activities
Industry (Micro & small, Medium and Large)
Personal Loans Disclosure in Banking/Financial Institutions-2 : 8/15/2010 43 Disclosure in Banking/Financial Institutions-2 Classification of deposits; Demand Deposit, Term Deposit Savings deposits
Segment wise advances, priority non priority, trading, industrial.
Advances to Sensitive sector-Real estate, Essential commodities, against shares
Investment portfolio-security wise
Reason of sudden decrease in profits or sudden increase in profits
Human resources (staff position or per employee productivity)
Whistle blowing policy
Segment wise other income Disclosure in Banking/Financial Institutions-3 : 8/15/2010 44 Disclosure in Banking/Financial Institutions-3 4 largest NPA accounts and amount involved therein
Area wise classification of branches net work
Cost of funds
Cost of deposit
Yield on advances
Vigilance cases and action taken there against
Mission & vision Latest Regulatory Directions : 8/15/2010 45 Latest Regulatory Directions From the year ending March 2010:
I. Concentration of Deposits, Advances, Exposures and NPAs
II. Sector-wise NPAs
III. Movement of NPAs
IV. Overseas assets, NPAs and revenue
V. Off-balance sheet SPVs sponsored by banks
In The formats prescribed by Regulator i.e. RBI
Whistleblower Policy of the company i.e. BANK. ESSENCE OF WORK LIFE AND WORK ETHICS : 8/15/2010 46 ESSENCE OF WORK LIFE AND WORK ETHICS Why work?
To purify the mind and the heart (Chittashuddhi’) and to become wise; to provide public benefit
What is work?
To nurture each other. It is a form of Yagna, sacrifice. It is the worship of the Divine
How to work?
With the spirit of renunciation, i.e., Tyag and to serve others without self-interest
Spirit of work
Excellence and perfection in work (GEETA PREACHES) Role of Disclosure in Corporate Governance : 8/15/2010 47 Role of Disclosure in Corporate Governance If investors are not confident with the level of disclosure, capital will flow elsewhere..”
Arthur Levitt, Former Chairman of US SEC Slide 48: 8/15/2010 48 THANK YOU
For your kind attention