RBI Guidelines for Tenure of Bank CEOs and MDs

The Reserve Bank of India recently laid down set of instructions to improve the corporate bank governance.

RBI Guidelines

• The post of MD and CEO shall not be held by the same person for more than 15 years. However, they can be reappointed after a cooling period of three years. During the cooling period, the individual shall not be appointed or associated with the bank or its group entities directly or indirectly.
• The MD or the CEO shall not hold these posts more than twelve years. However, in extraordinary circumstances, they shall be allowed to continue till 15 years.
• The guidelines are not applicable to the foreign banks whose branches are operating in the country.
• The maximum age limit of the Chairman or the Non-Executive Director has been fixed at 75 years.
• The fixed remuneration for the Non-Executive Directors shall not exceed Rs 20 lakhs. Remuneration is the money paid for work.

Significance of the Guidelines

In 2020, RBI released a discussion paper on governance in commercial banks in India. The changes are being made based on this.

According to RBI, the growing size of financial systems in India makes it essential to strengthen governance standards in the banks. The current system where the management of the banks play the role of an agent of the board and the board in turn plays the role of agent of shareholders has led to poor allocation of resources and poor protection of depositors. Thus, these changes are important.

Why are the guidelines needed?

• Recently, the space vacated by the public sector banks have been taken by the private sector banks.
• Inadequate system of checks prevails at the private banks of the country.
• The lenders are at risk of default rates though there has been overall improvement in asset quality.

Month: Current Affairs - April, 2021