In a significant move aimed at strengthening corporate governance and attracting more qualified individuals to bank boards, the Reserve Bank of India (RBI) has announced a revision in the remuneration cap for Non-Executive Directors (NEDs). Through its circular RBI/2023-24/121, the central bank has raised the ceiling on fixed remuneration granted to NEDs from ₹20 lakh per annum to ₹30 lakh per annum. This decision reflects the RBI’s recognition of the pivotal role that NEDs play in the efficient functioning of bank boards and their various committees.
Detailed Analysis
The RBI’s decision is rooted in the circular dated April 26, 2021, which first established the remuneration ceiling for NEDs. The increase to ₹30 lakh per annum is designed to further enable banks to attract and retain qualified and competent individuals on their boards. This adjustment is particularly relevant in the context of the increasingly complex and challenging environment in which banks operate, requiring directors who can contribute valuable insights and oversight.
The criteria for granting fixed remuneration to NEDs involve approval from the bank’s Board, considering the size of the bank, the experience of the NED, and other relevant factors. This flexible approach allows banks to tailor the remuneration to the specific needs and circumstances of the institution and its directors.
Additionally, the RBI mandates private sector banks to obtain regulatory approval for the remuneration of Part-time Chairmen, underscoring the regulatory oversight intended to ensure that compensation practices are both competitive and responsible. Banks are also required to disclose the remuneration paid to directors annually in their Financial Statements, promoting transparency and accountability in compensation practices.
Applicability and Commencement
The revised instructions are applicable to all Private Sector Banks, including Small Finance Banks (SFBs) and Payment Banks (PBs), as well as wholly owned subsidiaries of Foreign Banks. The implementation of these instructions is immediate, signaling the urgency with which the RBI intends to address the need for competent governance within the banking sector.
Conclusion: The RBI’s move to increase the remuneration cap for Non-Executive Directors is a forward-looking step aimed at enhancing the quality of corporate governance in banks. By enabling banks to offer more competitive remuneration, the RBI seeks to ensure that banks are not only governed by qualified individuals but also that these individuals are sufficiently rewarded for their contributions. This development is expected to have a positive impact on the banking sector’s ability to navigate the complexities of the modern financial landscape, ultimately contributing to the stability and growth of the economy.
Reserve Bank of India
RBI/2023-24/121
DoR.HGG.GOV.REC.75/29.67.001/2023-24
February 9, 2024
Dear Sir/ Madam
Review of Fixed Remuneration granted to Non-Executive Directors (NEDs)
Please refer to paragraph 9 of circular dated April 26, 2021 (Corporate Governance in Banks – Appointment of Directors and Constitution of Committees of the Board) as per which ceiling of ₹20 lakh per annum was specified in respect of remuneration of Non-Executive Directors (NEDs), other than the Chair of the Board.
2. Considering the crucial role of NEDs in efficient functioning of bank Boards and its various Committees and in order to further enable the banks to sufficiently attract qualified competent individuals on their Boards, it has been decided to revise the aforementioned ceiling to ₹30 lakh per annum.
3. The banks are required to have suitable criteria for granting fixed remuneration to its NEDs, with the approval of its Board before any review of the extant remuneration. The Board of the bank may fix a lower amount within the ceiling limit of ₹30 lakh per annum depending upon the size of the bank, experience of the NED and other relevant factors.
4. As hitherto, private sector banks would be required to obtain regulatory approval regarding remuneration to Part-time Chairman in terms of Section 10B(1A)(i) and 35B of the Banking Regulation Act, 1949.
5. Banks are required to make disclosure on remuneration paid to the directors on an annual basis at a minimum, in their Annual Financial Statements.
Applicability and Commencement
6. The instructions would be applicable to all the Private Sector Banks including Small Finance Banks (SFBs) and Payment Banks (PBs) as also the wholly owned subsidiaries of Foreign Banks. The instructions would come into force with immediate effect.
Power exercised
7. The instructions have been issued in exercise of powers conferred by Section 35B of the Banking Regulation Act, 1949.
Repeal
8. The instructions on Guidelines on Compensation of Non-executive Directors of Private Sector Banks issued vide circular DBR.No.BC.97/29.67.001/2014-15 dated June 1, 2015 stand repealed.
Yours faithfully
(Scenta Joy)
Chief General Manager
