Corporate Governance in NBFCs and its Role in Tackling Corporate Frauds

Ashish M. Shaji

19 Oct, 2020

The corporate governance in NBFCs is different as well as unique. It is because its activities are less transparent. Moreover, these financial institutions differ from many other companies when it comes to complexity and range of their business risks. Therefore the corporate governance structure is essential and it should be enhanced.

What do you mean by Corporate Governance in NBFC?

Corporate Governance means the set of systems, process and principles by which a company is governed. They lay down the guidelines as to how a company can be directed and controlled in a way that it can fulfil its goals and objectives such that it adds to the value of the company and is beneficial for stakeholders as well.

What is the significance of corporate governance?

The significance of corporate governance can be deduced by the following factors:

• Compliance and Risk Mitigation

Compliance, risk mitigation and governance are related to each other. A company is governed on principles that work accurately to ensure that compliance is implied on the company legally. If a company stays disciplined in its operations then it can tackle any risk arising out of any events, whether economical or technological.

• Essential for Mergers and acquisitions

Corporate governance is essential especially during restructuring events like mergers and acquisitions. It helps a company to differentiate between good and bad deals. Mergers and acquisitions can also improve the quality of corporate governance.

• Strengthen shareholder value

Corporate governance strengthens the shareholder contentment. It is essential in safeguarding the valuations of a company as the main goal of corporate governance is to maximize the concerns of the company’s shareholders.

• Improves organizational efficiency

Corporate governance plays a pivotal role in determining industrial competitiveness. Better Corporate governance in NBFCs provides enhanced corporate performance and also gives better economic results.

Recent steps by NBFCs for better Corporate Governance in NBFCs

Some of the recent steps by NBFCs in India for corporate governance in NBFCs are as follows:

• Constitution of committees such as Management Committee, investor’s grievances committee, ALM (Asset Liability Management) committee etc.
• Gradual implementation of prudential norms as stated by the Reserve Bank of India.
• Introduction of Citizen’s charter in NBFCs.
• Implementation of the concept of KYC (Know Your Customer).
• Responsibility of the Board of Directors and top management for good corporate governance.

What are some of the ethical issues in Corporate Governance?

A corporate fraud is a term used to denote a fraud that occurs within an organization by its own owners or by its managers and involves intentional dishonesty to trick the public, investors or lending institutions thereby resulting in financial gains to the individual or to the organization.  

Majority of the corporate frauds come under the category of asset misappropriation, money laundering, frauds done by senior management, accounting frauds and regulatory non-compliance.

The above mentioned practices dent the image of our financial system. The organizations are therefore required to be vigilant and attentive to these issues and concerns. They should adopt pro-active and anti-fraud measures as opposed being reactive.

What are the keys to solve these ethical issues facing corporate governance?

The following factors can be the key to solve the ethical issues:

• Sound Risk Management Framework

Due to the occurrence of major financial crisis, a lot of emphasis is given on strengthening the risk management practices for financial and non-financial institutions. In case of financial institutions^[1], much attention is given to financial risk like market risk, credit and liquidity.

• Data Management and Analysis

The ability of an organization to generate revenue, to manage expenses and to extenuate risks is known by its ability to share, store, retain and retrieve the escalating data. An effective management of data can attract large customer base and improve customer relationship as well thereby generating more revenue.

• Code of Conduct for Board of Directors

People have often questioned the need for corporate board however time and again it has been proven that their presence has made the difference at the time of organizational crisis.

• Internal and External Control System

The approved policies and procedures followed by the management to bring about smooth and proper functioning of business is the meaning of Internal Control system. It helps in avoiding different forms of risks like improper maintenance of accounts, frauds and unauthorized transactions which can affect the financial performance of an organization.

External control system involves the government regulations, market competition, public release and assessment of financial statements.

• Forensic accounting

Forensic accounting is a field related to accountancy profession wherein accountants implement their accounting skills, auditing and investigatory skills to detect frauds, bankruptcy and other litigations. The role of forensic accountants in probing corporate frauds has been widely spoken about. However, it is still in its early stages in India.

• Role of Independent auditor

The basic aim of formulating a set of codes for corporate governance is to enhance the auditing process so as to retain the interests of all stakeholders and investors. The auditor holds the authority to capture the offender, remove bias from the financial reports of the company and objectively report. Of late a lot of emphasis has been given on the auditor’s role with respect to Corporate Governance. It is because auditors are responsible for detecting scams. 

• The policy of Whistle blowing

It is considered as a valuable tool in an organization’s corporate governance strategy. It refers to the internal policy designed to give employees the option of reporting about any suspicious activity to the management which amounts to the infringement of company’s norms or code of conduct.   

Conclusion

Read our article:Major challenges faced by NBFCs & their solutions