The Telegraph
Since 1st March, 1999
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Jalan wants stronger code for NBFCs

Mumbai, Oct. 18 (PTI): The Reserve Bank of India today sought a “stronger” corporate governance (CG) code for deposit taking non-banking finance companies (NBFCs) in order to safeguard the interests of small depositors.

“There is a need for a stronger CG code in deposit taking NBFCs. It is no longer a matter of choice for them as many small depositors have invested in these entities,” RBI governor Bimal Jalan said at a national conference of ‘NBFCs—rejuvenating through corporate governance,’ here.

Referring to non-deposit taking NBFCs, he said in such entities, most of the money comes from the promoters themselves.

With liberalisation and deregulation, it has become necessary that CG is strengthened at the micro level for public interest, Jalan added. Advocating the need and role for self-regulatory organisations (SROs), the governor said “laid down regulations are not enough as no supervisor can look after the day-to-day management”.

He said 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 and it also affects those directly or indirectly connected with the same, he said.

Jalan said CG needs to have the three pillars of checks and balances; clear division of responsibility; and disclosure and transparency. Jalan said that the NBFCs need to have audit committees, which would be separate from those making decisions. A codified structure was necessary to have a clear division, both vertical and horizontal, of responsibility in an organisation, so as to avoid any debate on the decisions taken, he added.

The 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, mostly prevalent in Asia.

International agencies like the World Bank, IMF and Bank for International Settlements were also involved in implementing the aspects of governance, he said adding, they were also studying the Indian financial sector in this aspect.

Referring to the Indian financial sector, he said: “All things remaining same, a diversified financial system (with all types of intermediaries) is in the interest of the country. However, a diversified system does not mean tolerance of sloth and inefficiency.”

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