RBI asks to cap bankers’ incentives; move aimed at stopping private banks from disregarding rules

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Updated: November 5, 2019 10:57:43 AM

The Reserve Bank of India late Monday announced guidelines that cap the amount of variable pay, limit how much of it can be given in cash, and restrict guaranteed bonuses.

private banks, public sector bank, rbi, reserve bank of india, bankers incentives, bankers salaryPolicymakers would be hoping that tighter rules on pay will help discipline top bankers in the private sector.

India’s financial-sector regulator wants to link bankers’ pay more closely with their performance, as authorities look to clean up an industry reeling under a pile of bad loans and a slew of scandals. The Reserve Bank of India late Monday announced guidelines that cap the amount of variable pay, limit how much of it can be given in cash, and restrict guaranteed bonuses. It also asked banks to put in place a mechanism to “clawback” deferred payments in case the firm performs poorly.

The rules are “intended to reduce incentives towards excessive risk-taking that may arise from the structure of compensation schemes,” the RBI said. The new guidelines will take effect from April 1, 2020.

Policymakers would be hoping that tighter rules on pay will help discipline top bankers in the private sector, several of whom have been accused of flouting lending regulations to boost the business. Fresh guidelines on salaries for risk-control staff may also motivate them to catch irregularities that have led to massive fraud in India’s banking system.

RBI’s Guidelines:

  • Total variable pay capped at 300% of fixed pay
  • At least 50% of the total salary must comprise variable pay
  • At least 60% of the top executives’ variable pay must be deferred for at least three years
  • Guaranteed bonuses limited to joining bonus and/or the first year
  • Salaries of risk-control, compliance staff should be weighted in favor of fixed payments

The new guidelines come as some private banks try to claw back executive pay for alleged lending improprieties. The regulator last year also delayed year-end bonuses to the heads of top private banks and questioned the size of the payouts citing the lenders’ performance issues.

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