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RBI for self-regulation by NBFCs

BS Banking Bureau in Mumbai

The Reserve Bank of India is encouraging self-regulation among non-banking finance companies so that peer pressure makes them more vigilant and accountable to small depositors, according to central bank governor Bimal Jalan.

The governor, who was speaking at a seminar organised by the Hyderabad-based Academy of Corporate Governance, said corporate governance is not the most striking feature of the NBFC sector and a self-regulatory organisation set-up will act as a vital supporting framework to the annual inspection/ supervision carried out by the central bank.

"There is a need for stronger corporate governance code, especially among deposit taking NBFCs. It is no longer a matter of choice for them as many small depositors have invested in these entities," Jalan said.

Referring to the fact that the number of NBFCs runs into hundreds and 'anything' could happen between two inspections, Jalan stressed that an SRO could bring a modicum of self-discipline in the sector.

"A diversified financial system is in our interest. Different financial intermediaries act as a safety valve and ensure systemic stability. However, a diversified system, does not mean tolerance of sloth and inefficiency," the governor explained, adding that NBFCs should imbibe the spirit of corporate governance and have enough checks & balances in place.

"Further, to reinforce depositors confidence, they should ensure adequate disclosures/ transparency."

He suggested that large NBFCs operating on a larger canvas should direct their efforts at evolving a code of corporate governance.

Pointing to the difficulties being faced by NBFCs in raising resources from banks, Farouk Irani, managing director, First Leasing Company of India Ltd, said, the Centre/RBI should allow loans extended by banks to NBFCs, which on lend to the priority/core sectors, to be considered as part of their priority sector lending target.

This, he said, would help the NBFCs raise funds at competitive rates.

Referring to checks and balances, Jalan said these entities need to have audit committees, which were separate from those making decisions.

A codified structure was necessary to have a clear division, both vertically and horizontally, 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 corporate governance - 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 governance, which was mostly prevalent in Asia.

International agencies like 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 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, diversified system, does not mean tolerance of sloth and inefficiency."

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