Non-executive directors: RBI issues compensation norms for private banks

Private sector banks would have to obtain prior approval of RBI for granting remuneration to the part-time non-executive Chairman.

The Reserve Bank of India (RBI) has come out with guidelines on compensation to non-executive directors of private sector banks.

Under the guidelines, issued on Monday, the board of directors of such banks must, in consultation with its remuneration committee, formulate and adopt a comprehensive compensation policy for non-executive directors (other than the part-time non-executive chairman). While doing so, the board should ensure compliance with the provisions of the Companies Act, 2013.

The guidelines also allow the board the discretion to provide for in the policy payment of compensation in the form of profit-related commission to the non-executive directors (other than the part-time Chairman). This is, however, subject to the bank making profits. The upper ceiling for such compensation is fixed at Rs.1 million a year for a director.

In addition to the directors’ compensation, the banks are allowed to pay sitting fees to the non-executive directors and reimburse their expenses for participation in the board and other meetings, subject, of course, to compliance with the provisions of the Companies Act, 2013.

As has been the practice, banks in private sector would have to obtain prior approval of RBI for granting remuneration to the part-time non-executive Chairman.

The compensation policies of banks would be subject to supervisory oversight, including review under the Supervisory Review and Evaluation Process (SREP) under Pillar 2 of Basel II framework. Deficiencies would have the effect of increasing the risk profile of banks with attendant consequences, including a requirement of additional capital, if the deficiencies are very significant.

Also, the guidelines have made it mandatory for banks to make disclosure on remuneration paid to the directors on an annual basis at the minimum in their annual financial statement.

“The need to bring in professionalism to the boards of banks cannot be overemphasized. In order to enable banks to attract and retain professional directors, it is essential that such directors are appropriately compensated,” the RBI said.

At present, banks in private sector pay only sitting fees to non-executive directors, and no other remuneration is paid to them. The part-time Chairman, however, is being paid a fixed remuneration with the approval of RBI.

ED assumes office

Meena Hemchandra on Monday assumed charge as the Reserve Bank of India’s Executive Director. She will look after Department of Banking Supervision, Department of Co-operative Banking Supervision and Department of Non-Banking Supervision.