The fall of financial institutions is largely a result of governance failures and company board members must ensure checks and balances for the larger ecosystem, says entrepreneur Shachindra Nath, executive chairman and managing director, U GRO Capital.
In an webinar chat with Kailashnath Adhikari, MD, Governance Now – the 11th episode in the Visionary Talk Series held by the public policy and governance analysis platform on Monday, the founder of the Mumbai-based NBFC while speaking on governance and transparency and the role of the board in corporate governance said that governance is a loaded word and it brings balance.
“Any company, which is in the business of credit lending and has multiple stakeholders, needs good governance practices to bring balance around borrowers and deposit holders, i.e., lenders, shareholders and regulators. Failures happen when controllers of these entities want to build their businesses faster than the norm and their personal interest precedes the interest of the company. Where the control of the promoters is not curtailed well and the interest of stakeholders is not taken care of, all FIs are at risk of failure.”
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Nath said that a framework needs to be created for the larger ecosystem and having checks and balances. He said that historically we have presumed that it is the job of regulators to provide a framework to operate in. “The problem is, regulation does not differentiate between the controller and the supervisor and we believe it is the job of an RBI, SEBI or XYZ regulator.”
He said that the framework will provide the comfort that the company board members do not have a conflict of interest nor are they mere nominees of promoters but have the stature and depth of understanding to balance. The board and independent directors not only have to take care of equity shareholders but also simultaneously have checks and balances on issues that can affect the broader ecosystem.
Recalling his own experience of setting up U GRO, he said, “We knew governance cannot be mere lip service and part of our chartered document. To give an extra layer of governance I decided to list the company and raised sizeable capital largely from institutional investors. Upfront we created a framework within our articles. For example, it said majority of the board will perpetually remain independent directors. As promoter of company I have relinquished my right to nominate more than two board members. We cannot unilaterally fire our CRO or CFO and have to have approval of audit committee chairman,” said Nath.
Emphasizing on digitisation of services for providing and availing credit, he said that NBFCs have fiduciary responsibility as they borrow from banks to lend and responsible to return that money. They have to balance their approach and cautious of lending so as to get back the capital. For large lenders like big banks and diversified NBFCs assessing credit can be challenge and they resort to collateral based financing.
“While many small businesses may not have a collateral, the biggest challenge faced by SMEs is lenders not being able to assess the underlying cash flow and being able to lend against that. This could change with digitisation where the government is expending huge capital for building its infrastructure. It also depends on how you build your ability to understand the business and use data analytics and technology.”
Nath said that historically most small businesses do not have under writable financial data, i.e., proper tax returns, proper financials etc., and gradually with GST most problems are getting resolved. He said that every business must believe that credit is a need and the credit providers require a certain set of information which they should be ready to provide.
“Most small businesses are willing to pay extra cost for timely credit. In the Indian market where there is large corporate credit, SMEs or consumers, businesses are resilient and no financial services entity specially lending institution or bank should ever fail,” he said.
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