Bank Boards’ Governance: RBI Committee Recommendations

The Reserve Bank of India had constituted a Committee to review governance of Boards of Banks in India, in January 2014. The Committee was chaired by Dr. P. J. Nayak – Former Chairman & CEO, Axis Bank and had 7 other members.

 

The Committee has submitted its report which has been published in the RBI website on May 13th 2014. The recommendations of the said committee are summarized by InGovern below:

 

For Public Sector Banks (PSBs)

 

  1. The government should distance itself from several bank governance functions which it presently discharges.
  2. The Bank Nationalisation Acts of 1970 and 1980, SBI Act and SBI (Subsidiary Banks) Act should be repealed.
  3. All banks should be incorporated under the Companies Act, 2013.
  4. A Bank Investment Company (BIC) be constituted to which the government transfers its holdings in banks.
  5. The government’s powers in governance of banks should also be transferred to BIC.
  6. A 3-phase process of Board appointments should be envisaged. The duration of these three phases should be between two to three years. The phases are:
    1. Until BIC becomes operational, a Bank Boards Bureau (BBB) comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors.
    2. This function would be undertaken by BIC, which would also actively strive to professionalise bank boards.
    3. BIC would move several of its powers to the bank boards.
  7. Some bottlenecks in PSB governance, which needs to be addressed are:
    1. Dual regulation by Finance Ministry and RBI.
    2. Unclear Board constitution – Difficualt to categorise any director as Independent.
    3. Significant remuneration difference of PSBs with private sector banks.
    4. External vigilance enforcement through CVC and CBI.
    5. Applicability of the RTI Act

A more level playing field with private sector banks should be envisaged.

  1. Government should make efforts in reducing its stake in the PSBs to less than 50%.
  2. PSBs should envisage the need for wide-ranging human resource policy changes to encourage young talent into top management. It will lead to longer tenures and need for proper mechanism for succession planning.

 

For Private Sector Banks

 

  1. Promoters of private sector banks should be allowed to have a stake of upto 25%. At present the maximum limit is 15%.
  2. An Authorized Bank Investor (ABI) – Pension funds, Provident funds, Mutual Funds, Hedge Funds, ETFs, Private Equity Firms, etc. – should be allowed to have a maximum stake of 20% in a bank, without regulatory approval, or 15% if it has a seat on the bank’s Board.
  3. All other financial investors should be permitted upto 10%.
  4. For distressed banks, private equity funds – including sovereign wealth funds – should be permitted to have a stake of upto 40%.
  5. Boards should be vigilant about the quality of the loan asset portfolios.
  6. RBI should conduct random and detailed checks on asset quality in private sector banks.
  7. In case of significant evergreening in a bank, penalties should be levied through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on all whole-time directors, and the Chairman of the audit committee should be asked to step down from the board.
  8. Profit-based commissions should be permitted for non-executive directors, only after Bank Board have been empowered by BIC (Phase III).
  9. In old private sector banks, RBI should attempt to diversify boards in banks where independence is not visible, by mandating prior approval for directors in such banks.

 

Bank Investment Committee (BIC)

 

A Bank Investment Committee should be formed as a core investment company under the Companies Act and RBI registration and regulation. The BIC will hold equity stakes in banks presently held by the government and its character will be that of a passive sovereign wealth fund for the government’s banks. The government and BIC should sign a shareholder agreement which assures BIC of its autonomy. Some of the recommendations for the BIC are:

 

  1. CEO of the BIC should be a professional banker or private equity investment professional with substantial experience.
  2. CEO should be appointed through a search process.
  3. The BIC should have a non-executive Chairman.
  4. The CEO and Chairman of BIC can be nomination by the government.
  5. All other directors of the BIC should be independent directors and have requisite banking or investment skills.
  6. CEO should be tasked with putting together the BIC staff team.
  7. BIC employees should be incentivised based on the financial returns that the banks deliver.
  8. Government should cease to issue any regulatory instructions applicable only to public sector banks, as dual regulation is discriminatory. RBI should be sole regulator and regulations should be uniformly applicable to all commercial banks.
  9. The Government should also cease to issue instructions to public sector banks in pursuit of development objectives.
  10. BIC should also ensure that each bank splits the position of Chairman into a non-executive Chairman (nominated by BIC) and a CEO (nominated by the bank’s Board).
  11. After Phase III, where BIC will transfer all ownership functions to the bank boards, it will become a mere investor and will be tasked with the responsibility of protecting government’s financial investment in the bank.

 

Bank Boards Bureau (BBB)

 

Until the BIC becomes operational, a Bank Boards Bureau should be constituted and perform all the functions of BIC. The recommendations for BBB are:

 

  1. The BBB should comprise three senior bankers – serving or retired Chairmen of banks.
  2. Selection of non-official directors should be entrusted to the BBB.
  3. Where selections to top bank managements are proposed by BBB but not accepted by the government, BBB will make a public disclosure.
  4. The Chairman and each member of BBB shall have a max tenure of 3 years.

 

Banks Boards

 

  1. Bank’s boards have to comply with Clause 49 of the Listing Guidelines. There should be a appropriate mixture of independent and non-independent directors.
  2. A lead independent director would be nominated by independent directors (IDs) for each bank.
  3. The Bank Chairman should have a minimum 5-year tenure and Executive Directors, minimum 3-year tenure.
  4. Non-executive directors (including IDs) should have a maximum tenure of 7 years.
  5. There should be a cooling-off period of 5 years for the director to return to the same bank board, and 2 years for the director to be appointed on the board of any other bank.
  6. Maximum total directorships should be capped at 7 listed companies.
  7. RBI directors should step down from bank boards during Phase III of the transition process, unless the bank is troubled or raises special concerns.
  8. The position of Chairman & CEO should be separated during Phase III.
  9. The maximum age of whole-time directors should be 65.

To  read the full report released by RBI, please click here.