Ensuring the safety of, returns for depositors’ money is the first and foremost

Banking is no ordinary business. Banks are “special” business units which, as financial intermediaries, borrow money from savers to on-lend for productive ventures.

Thus, the underlying is one of the riskiest things in the world — money and money alone.

Banks run on public trust which, in turn, is a function of ethical principles and moral values they follow. The world is witness to numerous bank failures, small and large, which could not withstand the rigour of public trust. The ethical principles that banks follow ought to be of a higher order than those followed by any other businesses.

Depositors

A depositor saves his hard-earned money in a bank, first and foremost, for ‘safety’ and then ‘return’. By ‘safety’ we do not mean from theft or burglary alone but also safety of the intrinsic value of money. For example, if a depositor puts Rs 100 in his bank, he will definitely get back his nominal Rs 100 plus some interest after the contractual period.

However, economically speaking, does the value of money, in real terms, remain same over time? No. Due to inflation its real value erodes. Hence, the first ethical principle that a bank should follow with respect to its depositors is to protect the ‘real’ value of money by providing an interest rate which would eventually neutralise the impact of inflation and give a positive ‘real’ return over the contractual period.

Are Indian banks doing this at present? The answer is an unequivocal ‘no’. Recently, an RBI Deputy Governor proposed inflation-indexed bonds as a hedge against inflation. Why not inflation-indexed deposits?

The second ethical question is the protection of small depositors’ money from bank failures. In our country, up to Rs 1 lakh is insured by the DI&CGC (Deposit Insurance and Credit Guarantee Corporation).

The limit, which was revised in May 1993, has remained stubbornly static despite rise in per capita income and inflation.

Net Interest Margin

Our bankers are ‘programmed’ to be obsessed with targets. To achieve the ‘agreed’ level of profits, they artificially keep deposit rates low and lending rates high so that NIM is maximised. Is it ethical to penalise both depositors and borrowers like this?

The RBI Governor D. Subbarao in his speech “Five Frontier Issues in Indian Banking” at BANCON 2010 had argued for “a balanced approach to bring down NIM…”

Sub-PLR Lending

Until July 1, 2010, banks had got into the unfair practice of sub-PLR lending to certain borrowers. Fortunately, the RBI constituted a Working Group on BPLR (Chairman: Shri Deepak Mohanty) and Base Rate system came into being. Since then the administration of lending rates has become transparent, an essential quality expected from entities like banks at all levels.

Customer Service

Ethics should dominate customer service rendered by banks. Business etiquette should be an integral part of ethical customer service. Bankers need to be trained in this line. Fundamentally, banks should not differentiate customer service rendered to a small customer and a large customer.

Whether it is a depositor, borrower or simple service seeker there should not be any hidden charges cropping up from time to time because of the ‘fine-print’.

Accounting, disclosures

Banks’ balance-sheets and profit and loss accounts along with other statutory disclosures must reflect the true scenario of banks. Data purity and integrity are of paramount importance for banks from the viewpoint of all stakeholders. Corporate governance holds the key here.

Employees

If employees are demoralised by unethical policies relating to their service conditions, their frustration would be reflected in a bank’s businesses, howsoever ethical it may be to its customers.

(The author is a former commercial bank economist.)

(This article was published on November 18, 2012)
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