The Reserve Bank of India (RBI) has proposed new set of rules on multiple matters including the variable pay of top executives of banks. The regulator in a discussion paper has proposed multiple changes in the compensation and variable pay for top bank executives.
As per the new set of rules RBI posted on its official website, “Banks are required to put in place appropriate modalities to incorporate malus/claw-back mechanism in respect of variable pay.”
The new rules would be applicable on the Indian banks and according to them banks need to incorporate Malus(financial penalties)/ Claw-back( the clause regarding taking the disbursed money back) provisions in their agreement, if banks contributes negatively in any year.
The new guidelines are directed for the effective governance of the compensation and balancing fixed pay and variable pay given by the banks. Banks earlier have tried to give fat bonuses to their top executives and has also done increments in the wage for employees even at the time when lenders are facing rising debt, surging bad loans and increasing NPA‘s. Now after the new guidelines banks wont be able to do so.
Along with this, RBI has also put a cap over the variable pay of the employees and executives. The newly proposed guidelines reads, “The total variable pay shall be limited to a maximum of 200% of the fixed pay (for the relative period). Within this ceiling, at higher levels of responsibility, the proportion of variable pay should be higher. The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable compensation paid.”
The regulator has asked for the reviews of the lenders on the proposed discussion paper by march 31 and if these guidelines gets final approval by RBI will be applicable from fiscal year 2019-20. The new guidelines will be imposed on private lenders, small finance banks, payments bank and wholly owned subsidiaries of foreign banks.