RBI to Frame Rules for Bank CEOs’ Pay

Could link re­mu­ner­a­tion to bal­ance-sheet size, loan delin­quency, prof­its and gover­nance record

The Economic Times - - Disruption: Startups & Tech - Su­[email protected] times­group.com

Mum­bai: The Re­serve Bank of In­dia (RBI) is work­ing on a set of rules that would link re­mu­ner­a­tion of banks CEOs to pa­ram­e­ters like bal­ancesheet size of a bank, loan delin­quency, prof­its and gover­nance record.

The pro­posed frame­work is ex­pected to pro­vide a broad tem­plate to the board of di­rec­tors of banks while ap­prov­ing in­crease in salary, per­for­mance bonus and stock op­tions to the se­nior most ex­ec­u­tive.

The reg­u­la­tory guid­ance that ex­ists to­day is a gen­eral di­rec­tive on the re­mu­ner­a­tion of se­nior of­fi­cials in broad func­tions like ‘busi­ness’, ‘con­trol’ and ‘risk’. What is be­ing con­sid­ered is one that specif­i­cally re­lates to CEO com­pen­sa­tion.

“Even to­day RBI clears the re­mu­ner­a­tion of a bank CEO and has the pow­ers to claw back a slice of it in case of non-per­for­mance or gover­nance lapses. How­ever, a frame­work would en­sure that the board does not have to shoot in the dark while ap­prov­ing the pack­age for the CEO and re­fer­ring it to RBI for its clear­ance,” a per­son aware of the plan told ET. Though such a frame­work would be sig­nif­i­cant for pri­vate banks, it would also hold rel­e­vance for PSU banks which are con­sid­er­ing in­cen­tives and ESOPs for em­ploy­ees.

Cen­tral bank of­fi­cials have shared the idea with se­nior bankers in the course of con­ver­sa­tion. “As we un­der­stand the pro­posal was broadly agreed upon to­wards the end of Ur­jit Pa­tel’s exit. We tend to be­lieve that RBI would pur­sue this un­der the new Gover­nor. Prob­a­bly, it is also be­lieved that given the tur­moil in the bank­ing sec­tor, even a draft guide­line on CEO pay giv­ing out the broad con­tours, would send the right sig­nal,” said a se­nior banker.

GREATER MON­I­TOR­ING BY RBI

In the wake of in­stances of large non-per­form­ing as­sets, sharp prac­tices like in­ad­e­quate pro­vi­sion­ing of sticky loans, air-brush­ing fi­nan­cials to prop up profitabil­ity, and evi- dence of fidu­ciary neg­li­gence by board of di­rec­tors, the reg­u­la­tor is bring­ing about finer changes in its su­per­vi­sion style – some of which are aimed at as­sess­ing the per­for­mance of bank boards.

“For in­stance, RBI in­spec­tors are be­gin­ning to ask banks whether any of the in­de­pen­dent di­rec­tors have given a dis­sent on cer­tain pro­pos­als which a board and the man­age­ment may have even­tu­ally passed; whether such dis­sent notes have been prop­erly recorded...,” said an­other banker.

Also, in some RBI has in­sisted that the non-ex­ec­u­tive chair­man and the head of bank au­dit com­mit­tee are present in the meet­ing that fol­lows the com­ple­tion of the an­nual in­spec­tion of a bank by the reg­u­la­tor. “RBI wants to know whether these ex­ter­nal di­rec­tors have been kept in the loop on cer­tain de­ci­sions and what they think about these de­ci­sions. More than ever, the reg­u­la­tor is keen to know about the qual­ity of de­bate within bank boards, and the in­volve­ment of in­de­pen­dent di­rec­tors.. In other words, a non-ex­ec­u­tive chair­man or other out­side di­rec­tors can­not get way eas­ily,” said the banker.

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