RBI to issue new guidelines on salaries of private, foreign bank executives

The new circular also provides for 75% consent by value for a resolution plan to be passed

The Reserve Bank of India (RBI) will soon come up with new guidelines on effectively aligning the pay of senior executives in private, foreign banks with prudent risk taking, said the central bank’s deputy governor, N S Vishwanathan on Tuesday. 

The central bank had floated a discussion paper on this issue in February, touching upon the that at least have the compensation of a chief executive officer (CEO) should be variable. There was no such threshold earlier. The paper also said the stock options should be part of the variable pay, against the practice of keeping it beyond the scope of the official compensation package.

“We found there was need for some review, so last year we had issued draft guidelines. We have got excellent comments. We will soon come out with the final guidelines,” said Vishwanathan. 

There was also a provision for penalty in the CEO’s pay if the bank underreported bad dent of provisioning. There would also be no “guaranteed bonus”. 

The discussion paper also said the compensation of material risk-takers should be adjusted for all types of risk. The compensation payout should be sensitive to the time horizon of the risk. 

Since the 2008 global financial crisis, the regulator has been hawkish about compensation of bankers as it was one of the reasons for the crisis. Employees were often awarded for increasing short-term profit without adequate recognition of risks and long-term consequences. The Financial Stability Forum, 2009, had made some regulations on sound compensation. 

Vishwanathan also spoke on the February 12 circular that was declared null by the Supreme Court. Then the RBI issued the June 7 circular, providing a 30-day review period. Banks have to sign inter-creditor agreements (ICAs) for working out a resolution of the asset, followed by a 180-day period for resolution.

“In the new circular, we have given a lot of freedom to banks on how to determine the contours of the resolution. One of things that it does require is the ICA, which helps determine how banks will deal with the stressed assets,” he said. 

He added, “I would urge you to do the resolutions on time. It is not only a regulatory requirement but also leads to value creation.” 

The new circular also provides for 75 per cent consent by value for a resolution plan to be passed. Provisioning requirements, however, are tighter if no resolution is found. 

If no resolution is found in a year, banks have to provide a 50 per cent provisioning. After 15 months, it has to be 75 per cent.