RBI Caps Private Bank CEO Tenure At 15 Years

In a move that will have an impact on governance protocols at universal private lenders and small finance banks, the Reserve Bank of India capped tenure of managing directors and chief executive officers, or whole-time directors, at 15 years from the date of first appointment.

MDs & CEOs or whole-time directors of private banks who have completed 15-year tenure would be eligible to be reappointed in the same bank only after a cooling off period of three years, the regulator said in a circular on Monday. “During this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly.”

The RBI had first released the draft guidelines with these recommendations in August 2020. Monday's announcement officially curtails tenures of long-serving CEOs at private banks.

In case of MDs & CEOs or whole-time directors who are also promoters or major shareholders of the bank, the regulator has ordered for an even shorter tenure of a maximum of 12 years. Their tenure, however, may be extended to 15 years at the sole discretion of the RBI.

The upper age limit for MDs & CEOs and whole-time directors would continue to remain 70, the RBI said. Within the overall limit of 70 years, as part of their internal policy, individual bank boards are free to prescribe a lower retirement age for whole-time directors, including the MD & CEO.

“The guidelines are very important with respect to governance in private banks. Earlier, the RBI had an ad hoc approach to CEO appointments at banks. Since 2017, we have had a few instances of bank CEOs seeing their tenures cut short by the RBI, which caused some confusion as far as management is concerned,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services. “Having a clear framework helps banks plan succession better. It is also more preferable for institutions to have a clear pathway, when looking at CEO appointments.”

Banks are expected to be compliant with these guidelines from Oct 1. In case of MDs & CEOs or whole time directors who have already completed their tenure by the time these guidelines are effective, the RBI has allowed them to serve the remainder of their tenure as approved by the RBI. The banking regulator usually provides a three-year appointment for MDs & CEOs of banks, after which the board must seek reappointment.

The regulator also notified other regulations to improve governance. Some of these guidelines include:

• Chair of the bank’s board must be an independent director
• If the chair of a bank board is not an independent director at the time of issuance of this circular, they will be allowed to complete their current term as approved by the RBI.
• The quorum for the board meetings shall be one-third of the total strength of the board or three directors, whichever is higher.
• At least half of the directors attending the meetings of the board shall be independent directors.
• Audit committee of the board shall only consist of non-executive directors.
• The chair of the board shall not be the head of the audit committee.
• The chair of the audit committee shall not be part of any other board committee which approves credit decisions.
• The audit committee shall meet once every quarter, where at least three members are present.
• The board of the bank shall constitute a risk management committee where majority members are non-executive directors.
• At least half the members of the risk management committee shall be independent directors of which at least one member shall have professional expertise or qualification in risk management.
• Meetings of the risk management committee shall be chaired by an independent director, who shall not be the chair of the board or of any other board committee.
• The nomination and remuneration committee of the board shall consist of only non-executive directors.
• The nomination and remuneration committee of the board shall meet with a quorum of three members, where at least half are independent directors and one member from the risk management committee.
• The chair of the board may not head the nomination and remuneration committee.