The RBI released a discussion paper on ‘Governance in Commercial Banks in India’ on 11 June 2020 with the objective of setting higher aspirational standards for entities engaged in financial intermediation. The paper reviews the extant instructions/guidelines/directions of the RBI and other guidelines in the public domain such as those of the Basel Committee of Banking Supervision (BCBS), Financial Stability Board (FSB) as well as the Banks Board Bureau. Given the recent cases of governance failure in banks in India, the paper underscores the importance of the quality of governance and its impact on protection of depositors’ interest and maintaining financial stability.
The contents of the paper apply to Private sector banks including Small Finance Banks (SFBs), Payments Banks (PBs), wholly owned subsidiaries of foreign banks and foreign banks operating in India under branch model. They also apply to the State Bank of India, Nationalised Banks and Regional Rural 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 major shareholder/promoter viz., Government of India retains its instructions.
The Paper discusses the overall responsibilities of the Board of Directors and its committees in great detail. It also proposes a limited tenure for the CEO/WTD of a bank.
In short, the responsibilities of the Board are as follows:
Age limit & tenure of CEOs/WTDs : The upper age limit for CEO/WTDs of banks is 70 years. Within the overall limit of 70 years, an individual bank’s board may prescribe, as an internal policy, a lower age limit for CEO/WTDs. The tenure of the WTDs or CEOs is limited to 10 years. It is felt that 10 years is an adequate time limit for a promoter / major shareholder of a bank as WTD or CEO of the bank to stabilise its operations and to transition the managerial leadership to a professional management. This will not only help in achieving the separation of ownership from management but also reinforce a culture of professional management.
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. During this three-year period the individual shall not be appointed or associated with the bank in any capacity, either directly or indirectly, advisory or otherwise.
Banks with WTDs or CEO who have completed 10 or 15 years on the date of issuance of the guideline/directions by the Reserve Bank (basis this discussion paper), shall have two years or up to the expiry of the current tenure, whichever is later, to identify and appoint a successor.
The new guidelines/ direction shall come into effect within a period of six months after being placed on the website of the Reserve Bank or April 1 2021, whichever is later. During this period banks shall ensure that its Memorandum of Association/Articles of Association/ any agreements/ board of director or shareholder resolutions/ composition of the board and the committees of the board are consistent with the new guidelines/directions as well as applicable statutes/regulations.
Comments from stakeholders have been invited by 15 July 2020. To refer to the Discussion Paper dated 11 June 2020, click here.
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