Reserve Bank proposes to shore up bank boards

The Reserve Bank of India (RBI) has proposed a stronger board for banks in the country for improving governance and proposed stringent norms for chief executive officers and whole time directors.

The norms are applicable for private banks, foreign banks and also public sector banks except in so far as what is prescribed is not inconsistent with provisions of specific statutes applicable to them or in case where the government retains its instructions.

In a discussion paper on governance in commercial banks in India, the banking regulator has suggested to empower the bank board for setting the culture and values of the organisation, recognize and manage conflicts on interest, setting the appetite for risk and manage risks within the appetite and improving the supervisory oversight of senior management.

“Improving the quality of governance in financial intermediaries is an important determinant of efficiency in allocation of resources, protection of depositors’ interest and maintaining financial stability,” RBI said.

The RBI said board members should not be a member of any other bank’s board or the RBI and should not be either a Member of Parliament or State Legislature or Municipality or other local bodies.

Board of directors of a bank should not be less than six and not more than 15 directors, with majority being independent directors, RBI said.

“The board shall meet at least six times a year and at least once every sixty days..The board shall not have more than three directors who are directors of companies which among themselves are entitled to exercise more than 20% of the total voting rights of all the shareholders of the bank,” the discussion paper said.

It is proposed that a director on the board of an entity other than a bank may be considered for appointment as director on the bank board, if the person is not an owner of an non-banking finance company, or a full time employee and that the NBFC does not enjoy a financial accommodation from the bank.

The discussion paper suggested appointment, re-appointment and termination of wholetime directors and chief executive officers should be with the previous approval of RBI.

“The application for re-appointment must be made to RBI at least six months prior to completion of tenure of current incumbent and at least four months prior in case of appointment,” it said adding the application of appointment should have names of two persons in the order of preference.

The upper age limit for CEO and WTDs of banks is suggested at 70 years, which is a norm for private bank at present. Banks will be free to set an lower age for such appointments.

It is observed 10 years is adequate for a promoter of a bank to be as chief executive officer of the bank to stabilise operations, after which a professional CEO can take over. There are a few private banks, where the promoter continues to be a CEO even after 10 years of operation.

“Further, in the overall interest of good governance, a management functionary who is not a promoter / major shareholder can be a WTD or CEO of a bank for 15 consecutive years. Thereafter, the individual shall be eligible for re-appointment as WTD or CEO only after the expiration of three years,” the discussion paper said.

Based on the feedback, fresh guidelines will be issued. The new norms will come into effect within a period of six months after being placed on website of the Reserve Bank or April 01, 2021, whichever is later.

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Printable version | Oct 18, 2021 6:38:03 AM |

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