RBI to Frame Rules for Bank CEOs’ Pay
Could link remuneration to balance-sheet size, loan delinquency, profits and governance record
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.