RBI Tightens Rules For Directors On Public Sector Bank Boards

The Reserve Bank of India tightened rules for elected directors on the boards of public sector banks, responding to criticism that boards of these lenders failed to prevent a build-up of bad loans in the previous lending cycle.

In a set of master directions issued on Friday, the RBI laid down far tougher eligibility criteria and also put down a negative list of people who would not be eligible for appointment. The regulator also said that directors can be elected for a three-year period and cannot hold the post for more than six years in total.

‘Fit & Proper'

The new rules say that candidates to be considered for board should have experience relevant to banking companies in areas such as information technology, payments, human resources and other such fields. This provision is similar to what exists in private sector banks.

However, this time around, the RBI also laid down rules for those who will be considered ineligible for appointment to avoid conflicts. The rules say:

• Candidate should not be a board member of any bank, RBI, financial institution, insurance company or bank holding company.
• Candidate should not have served in board of bank, financial institution, insurance company for at least six years.
• Persons connected with hire purchase, financing, moneylending, investment, leasing and other para-banking activities will not be considered eligible.
• The candidate should not be engaging in the business of stock broking.
• Candidate should not be a Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies.
• Candidate should not be acting as a partner of a chartered accountant firm engaged as statutory auditor for a PSU bank.

The prescriptive rules mark a change from earlier rules where the RBI had laid down broad criteria, which said those with relevant experience, a good track record and integrity can be appointed as elected directors on the boards of public sector banks.

Process Of Electing Directors

The regulator has also reiterated the process that needs to be followed in the appointment of such directors. However, one important change made is the exclusion of the government nominee on the bank board from the committee that decides on appointments of directors.

The master directions say:

• All the banks are required to constitute a Nomination and Remuneration Committee consisting of a minimum of three non-executive directors, of which not less than one-half shall be independent directors.
• The committee should include at least one member from the risk-management committee of the board to establish ‘fit & proper' status of applicants.
• The Government of India nominee director and the nominee director on behalf of the RBI shall not be part of the committee.
• The non-executive chairperson of the bank may be appointed as a member of the committee but shall not chair the committee.