RBI tightens fit-and-proper criteria for directors on PSB boards

While the revised norms are applicable only to public sector banks, separate guidelines for private banks and non-banking financial companies may be in the offing

The Reserve Bank of India (RBI) has tightened the fit-and-proper criteria for directors on the boards of state-run banks, and said the Centre’s nominee director shall not be part of the nomination and remuneration committee (NRC). The revised criteria also, for the first time, laid down an exhaustive list for the disqualification of directors.

The terms with regard to the NRC and the manner of the appointment of directors have been aligned with the practice in private banks, the recommendations made by the Banks Board Bureau, and with the provisions in the Companies Act.

While the revised norms are applicable only to public sector banks (PSBs), separate guidelines for private banks and non-banking financial companies (NBFCs) may be in the offing.

The NRC will have a minimum of three non-executive directors from amongst the board of directors. Of this, not less than one-half shall be independent directors and should include at least one member from the risk management committee of the board. The format for the 'Declaration and undertaking by director’ has also been fleshed out and made more exhaustive.

What will also be under scrutiny is the 'list of entities’ in which a prospective director has an interest – to ascertain if such a firm is in default or has been in default in the past decade. This is with respect to the credit facilities obtained from the bank (in which a directorship is being evaluated), any other bank, NBFC or other lending institution.

The negative list says that the candidate should not be a member of the board of any bank, the RBI, financial institution (FI), insurance company or a non-operative financial holding company (NOFHC).

The candidate should not be connected with hire-purchase, financing, money lending, investment, leasing and other para-banking activities. But “investors of such entities would not be disqualified for appointment as directors if they do not enjoy any managerial control in them”, said the central bank.

No person is to be elected or re-elected to a bank board if the candidate has served as a director in the past on the board of any bank, the RBI or insurance company under any category for six years, whether continuously or intermittently. The candidate should not be engaging in the business of stock broking.

The candidate should not be a member of Parliament, state legislature, municipal corporation, municipality, or other local bodies — notified area council, city council, panchayat, gram sabha or zila parishad.

Other conditions are that candidate should not be a partner of a chartered accountant (CA) firm currently engaged as a statutory central auditor of any nationalised bank or State Bank of India; or when the firm is engaged as statutory branch auditor or concurrent auditor of the bank in which nomination is sought.

In effect, the RBI has today telegraphed that it has enough authority over PSBs with regard to the constitution of their boards. RBI Governor Shaktikanta Das told Business Standard this week that in the context of private sector banks, the RBI enjoys certain powers, which it doesn’t enjoy in the context of PSBs.

“But I don’t see that as a handicap in the RBI’s regulatory or supervisory functions, as banking regulations are applicable to private, public and foreign banks also. In the case of supervision, we have got identical powers for all of them. So, in regulation and supervision, we have enough powers and there is no differentiation between public sector and private sector banks.”

‘Fit & proper’ regime

• Members of Parliament, state legislatures, and local governments not eligible to be members of PSB boards

• 'Declaration and undertaking by director’ made more exhaustive

• Maximum tenure on board pegged at six years

• Candidates cannot be board member of rival banks

• Directors' connection with defaulting firms, links with chartered accountancy firms to be no-go areas

• No links with financial institutions, insurance firms, and non-operative financial holding companies