In order to enable banks to attract and retain professional directors, the RBI has asked the Board of Directors to formulate a comprehensive compensation policy, including payment of compensation in the form of profit related commission, for non-executive directors of private banks.

Such compensation, however, shall not exceed ₹10 lakh per annum for each director. This should be along with sitting fees and reimbursement of expenses for participation in the Board and other meetings.

At present, banks in the private sector pay only sitting fees to non-executive directors, and no other remuneration is paid to them. The part-time Chairman however, is being paid a fixed remuneration with the approval of the RBI.

In a notification, the RBI said private sector banks would be required to obtain prior RBI approval for granting remuneration to the part-time non-executive Chairman under the Banking Regulation Act, 1949.

“The compensation policies of banks would be subject to supervisory oversight including review under the Supervisory Review and Evaluation Process (SREP) under Pillar 2 of Basel II framework. Deficiencies would have the effect of increasing the risk profile of banks with attendant consequences, including a requirement of additional capital if the deficiencies are very significant,” the notification said.

Further, banks are required to make disclosure on remuneration paid to the directors on an annual basis at the minimum, in their Annual Financial Statements. “The Board of Directors, in consultation with its Remuneration Committee, should formulate and adopt a comprehensive compensation policy for the non-executive Directors (other than the part-time non-executive Chairman). While formulating the policy, the Board shall ensure compliance with the provisions of the Companies Act, 2013,” RBI said in a notification.

The need to bring in professionalism to the boards of banks cannot be overemphasised, the central bank said.

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