The norms introduced by the RBI for compensation of chief executives and board members of private sector banks have been viewed as an effort to improve transparency and accountability of the banking system.
In a discussion paper, RBI had stated that 50% of the compensation should be variable and that employee stock options (ESOPs) should be a part of the variable pay. The new norms propose variable pay to be capped at 200% of fixed pay, compared with 70% now. Also, ESOPs are not a part of variable pay now.
RBI had also intended that if there is a divergence in a bank’s asset classification or provisioning from the central bank’s norms that exceeds the prescribed threshold for public disclosure, the lender shall not pay the unvested portion of the variable compensation for the assessment year.
There have been examples wherein some banks had reported significant divergence in disclosing bad loans and provisioning.
Welcoming the proposed norms, bankers stated these were part of a global trend where the banking regulator was imposing stringent norms for compensation of chief executives. “This makes the chief executives more accountable,” said the senior executive of a private bank. “It is part of a global trend. They have made the norms more specific,” stated Rajiv Lall, non-executive chairman, IDFC First Bank.
“This will help to improve transparency and [bring in] greater accountability in the banking system,” Mr. Lall continued.