The Reserve Bank of India has come up with a discussion paper on governance in commercial banks, whereby it has proposed to limit the term of a bank promoter to hold the position of a CEO or whole-time director.
According to the RBI paper, a promoter or major shareholder of a bank may continue as CEO or whole-time director for a maximum period of 10 years. After this term, they must shift back to professional management position.
The central bank also proposed that in the overall interest of good governance, a management functionary who is not a promoter or a major shareholder can be a whole-time director or CEO of a bank for 15 consecutive years.
Thereafter, the individual shall be eligible for re-appointment as whole-time director or CEO only after the expiration of three years.
During this three-year period, the individual shall not be appointed or associated with the bank in any capacity, either directly or indirectly, advisory or otherwise.
The discussion paper said that to build a robust culture of sound governance practice, professional management of banks and to adopt the principle of separating ownership from management, it is desirable to limit the tenure of the whole-time directors (WTD) and CEOs.
"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 to transition the managerial leadership to a professional management," it said.
It noted that the upper age limit for CEO and whole-time director of banks is 70 years. Beyond this, nobody can continue in the post. Within the overall limit of 70 years, an individual bank's board can prescribe, as an internal policy, a lower age limit for CEO and whole-time directors.
On the date of issuance of the guideline or directions on the matter by the Reserve Bank on the basis this discussion paper, banks with WTDs or CEO who have completed 10 or 15 years shall have two years or up to the expiry of the current tenure, whichever is later, to identify and appoint a successor, it said.
The RBI has also proposed clear demarcation of duties and responsibilities between the board and management of the bank.
Based on stakeholder feedback, it will issue necessary directions and guidelines and subsequently, if it considers necessary, issue clarifications in respect of any matter covered in the guidelines.
The new guidelines shall come into effect within a period of six months after being placed on the website of the Reserve Bank or April 1, 2021, whichever is later.