Banking Sector Reforms

Fit-and-Proper criteria for directors on PSB boards


From UPSC perspective, the following things are important :

Prelims level : About the criteria

Mains level : Governance of PSBs in India

  • The Reserve Bank of India (RBI) has tightened the fit-and-proper criteria for directors on the boards of state-run banks.

Changes in the fit-and-proper criteria

  • The terms with regard to the NRC and the manner of the appointment of directors have been aligned with the practice in private banks, the recommendations made by the Banks Board Bureau, and with the provisions in the Companies Act.
  • While the revised norms are applicable only to public sector banks (PSBs), separate guidelines for private banks and non-banking financial companies (NBFCs) may be in the offing.

Nomination and remuneration committee (NRC)

  • The Centre’s nominee director shall not be part of the nomination and remuneration committee (NRC).
  • The revised criteria for the first time laid down an exhaustive list for the disqualification of directors.
  • The NRC will have a minimum of three non-executive directors from amongst the board of directors.
  • Of this, not less than one-half shall be independent directors and should include at least one member from the risk management committee of the board.

List of entities

  • What will also be under scrutiny is the ‘list of entities’ in which a prospective director has an interest – to ascertain if such a firm is in default or has been in default in the past decade.
  • This is with respect to the credit facilities obtained from the bank (in which a directorship is being evaluated), any other bank, NBFC or other lending institution.

A not for member candidates

  • The negative list says that the candidate should not be a member of the board of any bank, the RBI, financial institution (FI), insurance company or a non-operative financial holding company (NOFHC).
  • The candidate should not be connected with hire-purchase, financing, money lending, investment, leasing and other para-banking activities.
  • No person is to be elected or re-elected to a bank board if the candidate has served as a director in the past on the board of any bank, the RBI or insurance company under any category for six years, whether continuously or intermittently.
  • The candidate should not be engaging in the business of stock broking.
  • The candidate should not be a member of Parliament, state legislature, municipal corporation, municipality, or other local bodies — notified area council, city council, panchayat, gram sabha or zila parishad.

In short: ‘Fit & proper’ regime

  • Members of Parliament, state legislatures, and local governments not eligible to be members of PSB boards
  • ‘Declaration and undertaking by director’ made more exhaustive
  • Maximum tenure on board pegged at six years
  • Candidates cannot be board member of rival banks
  • Directors’ connection with defaulting firms, links with chartered accountancy firms to be no-go areas
  • No links with financial institutions, insurance firms, and non-operative financial holding companies
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