RBI to tighten private banks' succession planning with stricter timeline

Ironclad succession process could weigh on extensions for current heads

The Reserve Bank of India (RBI) may stipulate stricter timelines to identify the managing director (MD) and chief executive officer (CEO)-designates in private banks and for them to settle down in their new roles. Extensions for current corner-room occupants could be linked to how robust the succession planning at the banks they helm is. 

Corner-room aspirants’ ‘demonstrable record of running significant commercial operations’, their board experience, and contribution to its deliberations will be key factors which could be taken into account by the central bank when evaluating candidature. The onus on the nomination and remuneration committee of banks is set to go up, even as private bank boards will have to engage deeper in succession planning. 

 

Succession planning at private banks is not hard-coded, and the central bank wants to ensure smooth baton changes. Also, cut down on ‘key personnel risks’, which pencil in contingency plans for outlier events. 

Succession planning is to go beyond what a private bank currently defines as its ‘top management’, and there is to be an identifiable second-in-command well ahead of an incumbent boss’ term comes to an end. Not many private banks have a deputy MD and CEO. 

 

 

A stricter succession planning framework had engaged the central bank when Urjit Patel was RBI governor, and it has been gathered that this has come ‘back on the regulatory agenda, following the developments at private banks over the past year’. The most recent of these being the central bank’s stance last week that the appointments of Sashidhar Jagdishan and Bhavesh Zaveri each as additional director and executive director be put on hold until a successor to MD Aditya Puri is decided.

 

Both Jagdishan and Zaveri had been speculated as being possible candidates to move into the corner room at the bank.

It may be recalled that the Sebi had mandated that there be a clearly articulated succession policy on April 17, 2014, and said that this will be a key function of the board of directors. This has come to be tested severely in the case of private banks, and the RBI is to get cracking on this front. The Basel-headquartered Bank for International Settlements in its ‘Corporate Governance Principles for Banks’, explicitly stresses on the need for succession plans for the CEO and other key positions.

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The exits of Chanda Kochhar at ICICI Bank, Shikha Sharma at Axis Bank, and Rana Kapoor at YES Bank  had put the banks’ boards in a spot. In the run-up to the hunt for successors to both Puri and IndusInd Bank’s MD and CEO Romesh Sobti, the spotlight was on whether the RBI will align the age limit for directors on private bank boards to 75 years (up from 70) with the Companies Act. 

As on date, private banks send a shortlist of three MD and CEO candidates to the RBI for its approval, four months before the incumbent’s term comes to an end. It was pointed out that there is nothing by way of regulations which prevents the boards from starting the succession process much in advance. “And there is no instance yet of a private bank’s head voluntarily calling time, having set in  motion a succession process well ahead of it,” said a source. 

In the specific case of YES Bank, the bank’s board, when seeking additional time to seek replacement for MD and CEO Rana Kapoor, made mention of his ‘role in the bank since inception’ and ‘the time-consuming challenges of finding a new successor’.