RBI keeps private banks waiting on bonus payment to top executives

The Reserve Bank of India (RBI) has started cracking down on bonuses to top executives at private sector banks.

According to sources familiar with the matter, the central bank is yet to grant its approval for bonuses to senior executives in private banks even as the financial year 2017-18 has come to an end. Generally, the central bank grants its approval by mid-March, or latest by March 31, but most banks have not received RBI approval on bonus packages this year.

Senior executives can be given more than their variable pay in the form of performance bonus. ICICI Bank’s MD and CEO Chanda Kochhar forwent her bonus in 2015-16 but the next year she was granted Rs 22 million. Aditya Puri, MD and CEO of HDFC Bank, was given a Rs 29 million bonus in 2016-17. In the same year, Axis Bank MD and CEO Shikha Sharma was to get a Rs 13.52 million bonus, which was 50% of her basic pay.

Axis Bank and HDFC Bank have policies stating variable pay will not exceed 70% of fixed pay, while ICICI Bank has not disclosed the maximum percentage.

According to sources, the RBI has yet to approve such bonuses at a time there is wide divergence between what the banks have reported as bad debts and what RBI auditors found.

The gross NPA ratio of ICICI Bank at the end of the December 2017 quarter was 7.82%, up from 7.2% a year ago. In the same period, Axis Bank’s gross NPA ratio was 5.28%, up from 5.22%, and HDFC Bank reported a gross NPA ratio of 1.29%, up from 1.05%. Gross NPAs in absolute terms rose more than 20% for Axis Bank and ICICI Bank, year on year, and 57% for HDFC Bank.

For private sector banks overall, their gross NPA ratio as a percentage of total assets was 4.15% at the end of the December 2017 quarter, up from 4.03% a year ago.

Mails sent to ICICI Bank, HDFC Bank and Axis Bank seeking comments on the central bank's discomfort with variable pay went unanswered. The RBI also did not offer any reply to a mail sent by Business Standard.

But sources said the regulator had sought clarifications on the bonus and variable pay structure of private banks. In response, HDFC Bank maintained it had followed the same structure for a decade and the RBI had approved those bonuses previously. Sources said Axis Bank had modified its pay structure for senior management, but the RBI was yet to respond.

They added the RBI was unlikely to approve high bonuses this time, but would not force the banks to give up bonus altogether as it was part of their pre-agreed variable pay structure.

The compensation committees of ICICI Bank, Yes Bank and IndusInd Bank had not received any communication from the RBI on salaries, sources said.

While the regulator has limited say over other components of variable pay, as these are part of pre-agreed packages, the central bank is scrutinising executive bonus. Globally, executive pay and compensation is a sensitive issue, but in India, it was not frowned upon. However, mounting bad debts may have changed the RBI’s opinion.

The total remuneration of the managing directors of five major private banks increased in 2016-17. Puri remains the highest paid bank MD with a marginal increase from Rs 97 million in 2015-16 to Rs 100 million in 2016-17. Kochhar earned a total of Rs 78 million in 2016-17, a 63% rise over the previous year. Sharma received Rs 60.1 million as compensation in 2016-17. Compared to them, the then State Bank of India chairman, Arundhati Bhattacharya, drew a salary of Rs 2.89 million in 2016-17.

According to the RBI’s definition, performance-based bonus is paid out annually and is “linked to performance achievement against balanced performance measures and aligned with the principles of meritocracy”.

“Banks that have not received a RBI query seem to be better off in having the bonus approved,” said a banker.

“The payment of all forms of variable pay is governed by the affordability of the bank and based on profitability and cost income ratios,” according to the RBI.