India Central bank limits single term of bank CEOs, managing directors to 15 years

Tuesday, 27 April 2021 00:17 - - {{hitsCtrl.values.hits}}

MUMBAI, (Reuters): The Reserve Bank of India said on Monday that chief executive officers and managing directors at Indian private-sector banks will be eligible to hold these posts for up to 15 years, as it unveiled a series of rules on term limits.

Analysts welcomed the new rules and said they may be extended to the shadow banking sector as well.

“These are some learnings from the banking crisis that unfolded last year from the Yes Bank case, so the RBI is putting these steps in place to ensure that such kind of issues do not arise in future,” said Asutosh K. Mishra, analyst at a domestic brokerage house, Ashika Stock Broking.

In March 2020, the central bank rescued Yes Bank, then the country’s fifth-largest private lender, as it reeled under a mountain of bad loans due to its exposure to shadow lenders and real estate companies.

The central bank also said on Monday that a CEO, MD or whole-time director (WTD) who is a promoter or major shareholder of a bank as well will not be eligible to hold these posts for more than 12 years, with an extension of up to 15 years permitted at its sole discretion.

Bank chiefs who are not promoters will be eligible for a second term, even after the 15-year period.

“Thereafter, the individual will be eligible for re-appointment as MD and CEO or WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years,” it added.

During this three-year gap, the individual shall not be appointed or associated with the bank or its group entities in any capacity, directly or indirectly, it added.

RBI also said the chairman of the board must be an independent director.

It also listed some other guidelines on the pay of non-executive directors, age limits and setting up of audits, remuneration and risk-management committees. The RBI has given banks until 1 October to comply with the rules.

However, the chairpersons, MDs, CEOs who have already completed 12 or 15 years will be allowed to complete their current term as already approved by the RBI, it said.

Mishra said lenders like Kotak Mahindra Bank may be affected though the impact will not be felt immediately as RBI has allowed CEOs to complete their current tenure.

Promoter Uday Kotak, who has been at the helm of the bank for over 12 years, had been re-appointed for a term of three years starting January 2021.

“The central bank may extend these rules even to the shadow banking sector, which will be a step in the right direction,” said India Ratings and Research Head of Financial Institutions Prakash Agarwal.