RBI proposes new set of rules
The Reserve Bank of India (RBI) has proposed a new set of rules, which include a large portion of compensation for bank chiefs in the form of variable pay.
They could also be liable for penalties if there is a divergence between bad loan assessment of the bank and the regulator.
“Banks are required to put in place appropriate modalities to incorporate malus/clawback mechanism in respect of variable pay, taking into account relevant statutory and regulatory stipulations as applicable,” said the RBI in a discussion paper released late on Monday.
In particular, the RBI wants banks to put such penalties in place when a divergence in asset classification is detected.
“Wherever the assessed divergence in bank’s asset classification or provisioning from the RBI norms exceeds the prescribed threshold for public disclosure, the bank shall not pay the invested portion of the variable compensation for the assessment year under ‘malus’ clause. Further, in such situations, no proposal for increase in variable pay (for the assessment year) shall be entertained.”
As part of the new proposals, the RBI is also suggesting quantitative and qualitative criteria is for identification of ‘Material Risk Takers.’ In addition, the regulator has suggested a set of rules for staff in compliance and risk-control functions.
“Members of staff engaged in financial and risk control should be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management’s influence on incentive compensation,” said the RBI.
The regulator has sought feedback till March 31. It hopes to make the new rules applicable from the new financial year 2019-20. The guidelines once approved will apply to private banks, small finance banks and payment banks. They will also apply to wholly owned subsidiaries of foreign banks.