Fixed tenures may be next for upper-layer NBFC chiefs under new norms

Proposal could mirror RBI's 15-year limit for private bank leaders

A fixed tenure for corner-room occupants in Reserve Bank of India (RBI) “upper-layer” non-banking financial companies (NBFCs) may be in the works.

 

The issue figured at a Department of Financial Services meeting on NBFCs chaired by Finance Secretary M Nagaraju on Thursday. It appeared under the agenda item “Governance reforms to include better leadership rotation”, along with “Clarity on NBFCs as potential banks”.

 

Many upper-layer NBFCs are hopeful of securing private bank licences, and the “idea may be to prepare them for the transition”, said a source.

 

The RBI’s four-tiered scale-based regulatory (SBR) approach seeks to eliminate arbitrage between banks and NBFCs, which was seen as detrimental to orderly growth and systemic stability. The layers are: “base” (NBFCs with assets of ~1,000 crore and below); “middle” (assets of ~1,000 crore and above); “upper” (to be specifically identified); and “top” (kept empty unless the banking regulator believes an NBFC poses potential systemic risk). The idea behind this architecture is to enhance transparency and governance without burdening entities with higher-level regulations.

 

It is surmised that the next step may include upper-layer NBFCs having to appoint at least two whole-time directors (WTDs), including the managing director (MD) and chief executive officer (CEO). This requirement was stipulated for private banks by the RBI in October 2023.

 

In April 2021, the RBI capped the tenure of private bank MDs and CEOs — whether promoters or professionals — at 15 years, with the age limit set at 70 years. This forced private banks to put in place clear succession plans by identifying candidates with the proven ability to run large businesses. The move to mandate two WTDs at private banks followed the same logic.

 

On the specific issue of a glide path for NBFCs to transition into banks, it is felt that this may be taken up by the committee on banking reforms, the formation of which was announced in the Union Budget for 2026-27 (FY27).

 

The meeting is seen as a follow-through to the Union Budget FY27 proposal to set up a ‘high-level committee on banking for Viksit Bharat’ to comprehensively review the banking sector.

 

What may now be on the anvil is something akin to the RBI’s circular of April 26, 2024. Mint Road issued this to provide greater clarity on the eligibility criteria for small finance banks (SFBs) to transition into universal banks. It fine-tuned the guidelines for ‘on-tap’ licensing of SFBs issued on December 5, 2019.

 

It may be recalled that an RBI Internal Working Group (IWG) to ‘review extant ownership guidelines and corporate structure for Indian private-sector banks’ (November 20, 2020) had made a case for allowing large corporate and industrial houses to promote banks. It said large NBFCs (with assets of ~50,000 crore and above), including those owned by corporate houses, could be considered for conversion into banks.

 

Mint Road, while accepting 21 of the IWG’s 31 recommendations, said “the remaining recommendations are under examination” in its press release of November 26, 2021. This was interpreted by bank licence hopefuls as leaving the issue open.

 

RBI lines up bank-style rules for big NBFCs

 

·  Upper-layer NBFCs may need two WTDs, including the MD and CEO — in line with RBI’s governance rule      for private banks

 

·  Scale-based regulation aims to curb bank–NBFC arbitrage and strengthen systemic stability

 

·  RBI panel backed big corporates as bank promoters, opening the door to large NBFCs

 

·  RBI accepted 21 of 31 IWG recommendations, keeping the remaining proposals under review