In response to the global trend of deregulation of financial institutions, Taiwanese government has been gradually trimming down its control over financial institutions since 1980. As a result, 16 privately owned banks received approval and were established between 1991 and 1992. Although only about 16 years has passed since then, some of those banks frequently encounter management crisis, due mostly to the low quality of their credit evaluation system in loan processing. As a result, bad debts lead to losses, generating confidence crisis, creating greater liquidity risk, and reducing the level of saving. The issue of credit risk is closely linked to the business ethics.
Financial stability is the foundation of economic development for a country. Since lending is the core of banking business, the effectiveness of control over loan quality directly determines the success of a bank. This paper provides a conceptual framework for analysis by reviewing related literature and studying practical examples of loan processing. We interviewed 16 financial experts in various banks owned both by the government and by private parties, and categorize the analysis by corporate culture, banking system, loan processing procedure, non-performing loan, and risk management.
Conclusion: 1. The employees in the more successful banks follow the rules closely, and abide by the principles when processing loans, resulting in higher loan quality; 2. The banks experienced hardship in business mostly because of issues related to the business ethics; 3. The corporate that regard highly business ethics usually operate better and are, therefore, reliable borrowers with lower credit risk; 4. To acquire loans, some borrowers with lower credit rating may exercise unethical practices; 5. Fierce competition among banks results in petite profits. For the longevity of business, it is crucial to consolidate credit risk management in loan processing; 6. Managers should highly value of the business ethics and take the ultimate responsibility in managing credit risk.
Suggestions to the management of the Bank: 1. Banks should regard “trust” highly and establish the business ethics; 2. Banks should enhance their internal management and be responsible to the society; 3. Establishing clear principles and procedures for credit evaluation and loan processing, preventing collusion between borrowers and bank employees; 4. Strictly controlling loan processing procedures, installing double-approval system, and effectively carrying out internal control and accounting system.