Ethical Banking Practices and Customer Trust: Evidence from Indian Banks

Abstract

This research paper investigates the relationship between ethical banking practices and customer trust in India's banking sector through an analysis of secondary quantitative data from ten major banks spanning 2019-2024. The study examines how ethical conduct across dimensions of governance, risk management, compliance, and corporate social responsibility translates into measurable customer confidence and loyalty. Using descriptive statistics, correlation analysis, and simple linear regression, the research provides empirical evidence of strong and statistically significant relationships between ethical practices and customer trust outcomes.

The Ethical Practice Index was constructed as a composite measure combining governance quality, risk management effectiveness, ethical compliance, and corporate social responsibility engagement. Customer trust was operationalised through multiple indicators, including deposit growth rates, customer retention rates, Net Promoter Scores, and composite trust indices.

The empirical findings reveal a very strong positive correlation (r = 0.935) between the Ethical Practice Index and Customer Trust Score, indicating that approximately 87.5% of the variance in customer trust can be explained by differences in ethical practice implementation across banks. Regression analysis demonstrates that each one-point increase in the Ethical Practice Index predicts an average increase of 0.809 points in customer trust scores, translating the relationship into quantifiable terms that support the business case for ethical banking. The regression model is highly statistically significant (p < 0.001), providing strong evidence that ethical practices are not merely associated with customer trust but serve as meaningful predictors of trust outcomes.

Temporal analysis across the 2019-2024 observation period documents consistent sector-wide improvement in both ethical practices and customer trust. The Ethical Practice Index increased by 12.5% over six years, while Customer Trust Scores improved by 9.7%. Governance quality emerges as the most influential individual dimension, demonstrating the strongest correlation with customer trust (r = 0.923). Private sector banks substantially outperform public sector institutions, with differences of 14.48 points in the Ethical Practice Index and 12.33 points in Customer Trust Score. Customer retention rates increased from 88.44% to 93.21%, and Net Promoter Scores demonstrated substantial increases. The research demonstrates that ethical banking practices constitute fundamental drivers of customer trust in India's financial system, justifying their treatment as strategic investments in institutional viability and stakeholder value creation.