15-year norm too liberal

RBI has decreed that the post of MD and CEO of a private bank cannot be held by the same individual for more than 15 years

The decision of the Reserve Bank of India (RBI) to cap the tenure of senior executives of private banks is a welcome step intended to ensure that entrenchment of personal and private interests at the top level do not work against the interests of the bank’s customers. The bank regulator has decreed that the post of MD and CEO of a private bank cannot be held by the same individual for more than 15 years and, in the case of promoter CEOs, the tenure should not exceed 12 years. Reappointment as CEO or whole-time director can be considered only after a three-year break. The age limit for these positions remains at 70 years, but banks are free to bring it down. For non-executive directors, the maximum tenure has been kept eight years and the age limit is 75 years.

These norms are badly needed as the operations of private banks have steadily increased in the country and they have an important role in the financial system. Private banks may be private legally and technically, but they are public institutions that handle large amounts of money belonging to the public. So they need to have sound norms of governance in public interest. There have been cases of diversion of funds for personal use and misuse of power to sanction loans and deployment of funds in dubious ventures. Ultimately, these irregularities work against the interests of the customers. Some of the private banks in the country have had their MD or CEO serving for decades. Such a long tenure is likely to make some of them consider the bank as their personal fiefdom. There have been examples of banks coming to grief because of the decisions and actions of such CEOs. Rana Kapoor, who is in jail now facing charges of receiving kickbacks to the tune of Rs 4,300 crore, was at the head of Yes Bank from 2003 to 2019.

There may be a view that the 15-year stipulation is too liberal. A term of five years may be too short a period for a chief executive to get used to the environment in the company, formulate and implement policies and make an impact. The regulator has decided that 15 years may be the maximum tenure, and that it is not too long a term. This may be true especially in the case of young companies. The limitation on tenure will encourage banks to groom younger leaders for the top position. However, it should be noted that a person at the top needs much less than 15 years to do harm to an institution. So effective internal checks and regulatory oversight by the RBI are crucial to ensure the health of a bank.