Soon, new rules may limit bankers' pay

Draft guidelines on liquidity risk management in eight weeks

Taking a cue from other banking sector regulators, the Reserve Bank of India (RBI) is set to issue fresh guidelines on compensation policies of private and foreign banks.

RBI is mandated to clear appointments, a practice it has followed for several years. But the banking regulator said it would now use the Financial Stability Board’s (FSB’s) principles that were recently endorsed by the G-20 to work out the new norms.

The FSB principles, released last month, suggested bank regulators step in to limit bonuses to a percentage of net revenue if an entity did not have a sound capital base. They also recommended that bonuses be deferred till banks regained financial health.

At present, RBI approves appointments of chiefs of private and foreign banks and takes into account the proposed compensation package. In case the regulator finds the compensation is not in line with the size of the bank or its financial strength, the appointment is reviewed. However, there are no formal guidelines for this.

The regulator has in the past asked some banks to change the proposed compensation for some of their top executives.

In case of public sector banks, which account for nearly three-fourths of lending and deposits, RBI is involved in selection of chairmen, managing directors and executive directors. Their compensation, often said to be much below industry levels, is fixed by the government.

RBI said compensation practices, especially of large financial institutions, were one of the factors that contributed to the recent global financial crisis.

RBI is drawing upon global developments in other areas as well. The regulator said it would issue draft guidelines on liquidity risk management over the next eight weeks.

Another area where new guidelines are in the offing is stress testing. The norms are expected by the end of January. The Indian banks had cleared the stress test last September, but RBI said the earlier norms needed enhancement in the light of international developments in recent weeks.

The new guidelines on regulation of banks are in the offing. RBI has, however, once again made a strong pitch for maintaining regulatory status quo — its second such statement in a week.