In order to introduce a robust culture of sound governance practice and adopt the principle of separating ownership from management, the paper said "it is desirable to limit the tenure of the WTDs or CEOs".
The RBI has proposed an upper age limit of 70 years for CEOs and whole-time directors of banks and a maximum term of 10 years for those belonging to the promoter group, as part of the exercise to improve governance in the banking sector.
The discussion paper released by the Reserve Bank of India (RBI) on Thursday said that chief executive officers (CEOs) and whole time directors (WTDs) belonging to the promoter group should pass on the managerial leadership to professionals after ten years.
“The upper age limit for CEO/WTDs of banks is 70 years. Beyond this nobody can continue in the post. Within the overall limit of 70 years, individual bank’s board can prescribe, as an internal policy, a lower age limit for CEO/WTDs,” said the discussion paper on which the RBI has invited comments from various stakeholders by July 15, 2020.
In order to introduce a robust culture of sound governance practice and adopt the principle of separating ownership from management, the paper said “it is desirable to limit the tenure of the WTDs or CEOs”.
It further said 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. This will not only help in achieving the separation of ownership from management but also reinforce a culture of professional management”.
A management functionary “who is not a promoter/major shareholder can be a WTD or CEO of a bank for 15 consecutive years”, the paper said, adding thereafter, the individual could be eligible for re-appointment as WTD 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.
On the date of issuance of the directions on the matter by the Reserve Bank, it said, “banks with WTDs or CEO who have completed 10 or 15 years should be given two years or up to the expiry of the current tenure, whichever is later, to identify and appoint a successor”.
The RBI said the objective of the discussion paper is to align the current regulatory framework with global best practices while being mindful of the context of domestic financial system.
The paper noted that growing size and complexity of India’s financial system underscores the significance of strengthening governance standards in banks.
Recent events in a dynamic and rapidly evolving financial landscape have led to increasing scrutiny of the role of promoters, major shareholders and senior management vis-a-vis the role of a board.
In the context where management plays the role of an agent of a board and the board in turn plays the role of an agent of shareholders, governance failures have brought to fore the impact of quality of governance on efficiency in allocation of resources, protection of depositors’ interest as well as maintaining financial stability, the paper said.