The Reserve Bank of India (RBI) announced on Monday that it will be chief executive officers and managing directors at Indian private banks entitled to hold these positions for up to 15 yearswhen it revealed a set of rules for running time limits.
Analysts welcomed the new rules and said they could be extended to shadow banking as well.
“These are some of the lessons learned from the banking crisis that emerged from the Yes Bank case last year. Therefore, RBI is taking these steps to ensure that such problems do not arise in the future,” said Asutosh K Mishra, analyst at a domestic brokerage house, Ashika Stock Broking.
In March 2020, the central bank bailed out Yes Bank, then the fifth largest private lender in the country, when it was under a mountain of bad loans due to its exposure to shadow lenders and real estate companies.
RBI’S NEW RULE
The central bank announced Monday that a CEO, MD, or full-time director (WTD) who is also a sponsor or major shareholder of a bank will not be able to hold these positions for more than 12 years with an extension of 12 years Allowed for 15 years at your own discretion.
Bank managers who are not promoters are entitled to a second term of office after the 15 years have expired.
“Thereafter, after a minimum gap of three years, the individual can be reappointed as MD and CEO or WTD in the same bank if deemed necessary and desirable by the board of directors,” she added.
During that three-year void, the person may not be appointed or affiliated with, directly or indirectly, in any capacity with the bank or its affiliates, she added.
RBI also said that the CEO must be an independent director.
It also listed some other guidelines on non-executive director remuneration, age limits, and the establishment of audit committees, remuneration and risk management committees. The RBI gave the banks until October 1st to comply with the rules.
The chairmen, managing directors, CEOs who have already completed 12 or 15 years, however, are allowed to complete their current term of office as already approved by the RBI, it said.
Mishra said lenders like Kotak Mahindra Bank could be affected, although the impact won’t be felt immediately as RBI has allowed CEOs to complete their current tenure.
Promoter Uday Kotak, who has headed the bank for over 12 years, was reappointed for a three-year term from January 2021.
“The central bank can even extend these rules to the shadow banking sector, which will be a step in the right direction,” said Prakash Agarwal, head of financial institutions at India Ratings and Research.
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