Fixed Tenures May Be Introduced for Upper-Layer NBFC Chiefs

Source: Business Standard

Context:

The government and the Reserve Bank of India are considering introducing fixed tenures for top executives of upper-layer non-banking financial companies (NBFCs) as part of governance reforms.

RBI’s Scale-Based Regulation (SBR)

The proposal aligns with RBI’s four-tier Scale-Based Regulation framework for NBFCs, which aims to strengthen oversight and reduce regulatory arbitrage between banks and NBFCs.

The four layers are:

• Base Layer: NBFCs with assets up to ₹1,000 crore
• Middle Layer: NBFCs with assets above ₹1,000 crore
• Upper Layer: Systemically important NBFCs identified by RBI
• Top Layer: Reserved for NBFCs posing significant systemic risk

Proposed Governance Changes

1. Fixed Tenure for Leadership
   • Senior executives of upper-layer NBFCs may be given fixed tenures similar to private bank CEOs.
2. Additional Whole-Time Directors
   • Upper-layer NBFCs may be required to appoint at least two whole-time directors (WTDs) in addition to the Managing Director (MD) and Chief Executive Officer (CEO).
3. Succession Planning
   • Similar to private banks, NBFCs may need structured succession plans to ensure leadership continuity.

Existing RBI Rules for Banks

• In April 2021, the RBI capped the tenure of MDs and CEOs of private banks at 15 years, with a maximum age limit of 70 years.
• This policy forced banks to strengthen governance structures and leadership planning.