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Jalan for self-regulation by NBFCs

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MUMBAI, Oct. 18

DR Bimal Jalan, RBI Governor, thinks self-regulation could go a long way in improving the level of corporate governance in the non-banking finance sector.

He told a gathering of NBFC officials today that the RBI would encourage setting up of a self-regulatory organisation (SRO) for non-banking finance companies.

"Self regulation is one of the key aspects of corporate governance, and an SRO for NBFCs would have an important role to play in vigilance and accountability to the peer group," he said.

The NBFC sector in India has multiple growth patterns and corporate governance has not been the most striking part of that structure, said Dr Jalan.

He emphasised that there was a clear distinction between deposit taking and non-deposit taking NBFCs and that it was particularly imperative to introduce corporate governance practices to the deposit takers, as it involves the interests of the public.

A key area of concern with the failure of NBFCs is the contagion effect, Dr Jalan pointed out. "If an NBFC cannot meet its commitments to its depositors, the depositors in turn cannot meet their commitment to the entire financial system," he said.

Dr Jalan said, that a diversified financial system would be desirable with different kinds of financial intermediaries, which have internal checks and balances.

Corporate governance must be applied across the spectrum of financial institutions as with liberalisation and deregulation in the financial system it has become increasingly important to have good governance even on micro-levels.

The important aspects of corporate governance are internal checks and balances. For example, auditing committees must be separate from decision making committees.

There must be a clear division of responsibility and disclosures and transparency at all levels, said Dr Jalan.

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