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
- Fixed Tenure for Leadership
- Senior executives of upper-layer NBFCs may be given fixed tenures similar to private bank CEOs.
- 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).
- 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.
