Jalan For Stronger Corporate Governance Norms In NBFCs

Mumbai, October 18: | Updated: Oct 19 2002, 05:30am hrs
The Reserve Bank of Indias (RBI) governor, Bimal Jalan, on Friday sought a stronger corporate governance (CG) code specially in deposit taking non-banking finance companies (NBFCs) in order to safeguard interests of the small depositors.

There is a need for a stronger CG code in deposit taking NBFCs. It is no longer a matter of choice as many small depositors have invested in these entities. If you do not manage it, someone will have to thrust it upon you, Dr Jalan said while addressing a National Conference of NBFCs Rejuvenating Through Corporate Governance organised by the Academy of Corporate Governance.

With liberalisation and deregulation, it has become necessary that CG becomes stronger at the micro-level for public interest, noted Dr Jalan.

Stressing on the need and role for self-regulatory organisations (SRO), he said: Laid down regulations are not enough as no supervisor can look after the day-to-day management. Guidelines are as good as implemented and it is the owners hands. The ultimate responsibility rests with them.

He said that there is a need to delineate interconnections between NBFCs, non-NBFCs, manufacturing and other related sectors and the SRO could play an important part here by developing guidelines and codes to be followed by them. Failure of any NBFC to meet a commitment has a contagion effect affecting even those who are not directly connected with it and CG has assumed added importance in the liberalised and deregulated financial sector which, is a fairly rec-ent phenomenon in India.

Dr Jalan stressed on the three pillars of CG checks and balances; clear division of responsibility; and disclosure and transparency.

Referring to checks and balances, he mentioned that these entities need to have audit committees, which were separate from those making decisions. A codified structure was necessary to have a clear division of responsibility in an organisation, so as to avoid any debate on the decisions taken, he added citing the example of a recent controversy in a reputed NBFC.

The RBI governor said there were two models for CG, outsider and insider. While the first deals with separation of ownership and management, the second has a small group of shareholders in the organisation handling CG, which was mostly prevalent in Asia. International agencies like World Bank, International Monetary Fund and Bank for International Settlements are also involved in implementing the aspects of CG, Dr Jalan said adding that they were also studying the Indian financial sector in this aspect.