Reserve Bank of India (RBI), based on discussion paper on ‘Governance in Commercial Banks in India’ in June, 2020 and feedback thereon, RBI has carried out a comprehensive review of Governance framework to address operative aspects. RBI has issued instructions in relation to the following aspects of board governance:

-Chairman of Board

-Board meetings

-Board Committees –Audit Committee and Nomination & Remuneration Committee

-Risk Management Committee

-Age, tenure and remuneration of Non-executive Directors

-Tenure of MD & CEO and Whole time Directors

-Transition to new norms

These instructions are contained in RBI’s instructions/guidelines dated 26th April, 2021. It is expected that master guidelines shall be issued in due course in near feature.

New guidelines for whom

The revised guidelines shall be applicable to the all the private sector banks, i.e., commercial banks including :

  • Small finance banks
  • Wholly owned subsidiaries of foreign banks
  • State Bank of India (to the extent not inconsistent with specific statutes applicable to such banks)
  • Nationalized banks (to the extent not inconsistent with specific statutes applicable to such banks)

These guidelines will not apply to :

  • Foreign banks operating as branches in India
  • Local Area Bank (guidelines to be notified separately)
  • Payment banks (guidelines to be notified separately)
  • Regional rural banks (guidelines to be notified separately)

These guidelines shall override earlier conditions, notifications, directions, regulations, guidelines etc issued by RBI prior to 26 April, 2021. Banks will have to be compliant with these guidelines by 1.10.2021. RBI shall review the level of progress and adherence to the dilution of promoter’s shareholding in bank.

Salient features of new Governance norms

  • To be complied with by October 1, 2021
  • Tenure of Managing Director (MD) and Chief Executive Officer (CEO’s) of private banks capped at 15 years
  • RBI may give extension of 3 years under extra ordinary circumstances.
  • MD/CEO/WTD’s shall be eligible for reappointment in the same bank after a gap of three years.
  • Professional MDs and CEOs can continue as such for 15 years and get reappointed after a gap of three years
  • During the cooling period of three years, such persons shall not be associated with the bank or its group companies / entities in any capacity, directly or indirectly.
  • Nomination and Remuneration Committee (NRC) and Audit Committee of Board (ACB) to comprise of only directors who are non- executive directors (NEDs)
  • Chairman of the board to be non-executive director but can not be a part of Audit Committee of Board (ACB)
  • ACB shall meet atleast once in a quarter
  • Atleast 50% of the board members attending board meeting should be independent directors (IDs) i.e., 50% to be considered for board attendance, not composition of board
  • Independent directors can continue till the age limit of 75 years
  • In private sector banks, no person can continue as MD/CEO/WTD beyond the age of 70 years. Within the overall age limit of 70 years, based on internal policy, bank boards will be free to prescribe a lower retirement age.
  • Independent directors can continue in position of ID for a maximum period of eight years, whether continuously or otherwise. However, they will be eligible for reappointment after a cooling period of three years.
  • Maximum age limit for MD /CEO/WTD shall be 70 years but board can fix a lower age limit, if it decides so.
  • Existing Chairman, MD, CEO or WTD can continue as such for which approvals have already been granted.
  • ACB meetings shall be chaired by independent director who shall not be chairman of any other committee of board
  • ACB Chairman shall not be a member of any board committee which has a mandate for sanctioning of credit exposures.
  • All ACB members shall be able to understand all financial statements as well as notes / reports attached with such statements. Atleast one member of ACB shall possess professional expertise / qualification of financial accounting or financial management (for example, application of accounting standards and practices, internal controls etc)
  • In case of RMCB, it shall be constituted with majority of NEDs and attendance at meeting shall be atleast with 50% independent directors with one member having professional expertise or qualification in risk management. Chair of RMCB shall be independent director.
  • Maximum remuneration of NEDs other than the Chairman shall not exceed Rs. 20 lakhs per annum
  • Remuneration to NED’s may be in the form of fixed remuneration commensurate with individual director’s responsibilities and demand on time such that it is able to attract qualified and competent individuals.

It is expected that new bank Governance guidelines shall increase the demand for IDs and NEDs in banks. These guidelines will also make a change in composition of board committees as new restrictions may need more directors where committees are more or board size is small. The new guidelines provide a strong constitutional framework for good and desirable board governance in banks.

For example, Chairman to be out of ACB or ACB Chair not be a part of committee sanctioning loans or that ACB / NRC to be totally independent are novel safeguards to ensure and enhance governance. Banks will also have to revisit their succession plans.

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October 2021