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As part of its plan to strengthen the governance in commercial banks, the Reserve Bank of India (RBI) has proposed to restrict promoters from holding the CEO position for more than 10 years.
The tenure of a non-promoter CEO will be capped at 15 years, according to a discussion paper issued by the central bank.
If the paper converts into regulation, it will have a significant impact on promoter-led banks including Kotak Mahindra Bank and Bandhan Bank.
In its discussion paper on Governance in Commercial Banks in India , the RBI said it is desirable to limit the tenure of whole-time directors (WTD) or CEOs to build a robust culture of sound governance practice and for professional management of banks.
It will also help separate ownership from management.
“Therefore, it is felt that 10 years is an adequate time limit for a promoter/major shareholder of a bank as WTD or CEO of the bank to stabilise its operations and transition the managerial leadership to a professional management. This will not only help in achieving the separation of ownership from management but also reinforce a culture of professional management,” the paper said.
The paper added that the board shall have a formal written ‘conflicts of interest’ policy and an objective compliance process to ensure its implementation. This could be seen in the light of the allegations made against former ICICI Bank CEO Chanda Kochhar.
Lines of defence
A risk governance framework needs to be put in place, including well-defined organisational responsibilities for risk management, typically referred to as ‘three lines of defence’ (a) first line of defence — the business line; (b) second line of defence — a risk management function and a compliance function independent of the first line of defence; and (c) third line of defence — an internal audit and vigilance function independent of the first and second lines of defence.
“In the context where management plays the role of an agent of a board and the board in turn plays the role of an agent of shareholders, governance failures have brought to the fore the impact of quality of governance on efficiency in allocation of resources, protection of depositors’ interest as well as maintaining financial stability,” RBI said.
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