What changed
RBI has now issued detailed compensation guidelines for NBFCs, as promised in the October 2021 SBR circular. The guidelines mandate a Nomination and Remuneration Committee (NRC) with specific duties, including aligning compensation with risk and ICAAP. They also specify principles for fixed and variable pay components, with variable pay linked to prudent risk-taking and symmetric outcomes.
What it means for you
NBFCs must formalize compensation policies that curb excessive risk-taking by KMPs and senior management. The NRC must work with the Risk Management Committee to ensure pay reflects risk horizons and capital adequacy. This aligns NBFC practices with banking sector norms, potentially increasing compliance costs but reducing systemic risk.
What you must do
- Constitute or strengthen your Nomination and Remuneration Committee (NRC) as per Section 178 of Companies Act, 2013.
- Develop a Board-approved compensation policy covering fixed/variable pay, malus/clawback, and risk alignment.
- Ensure variable pay is symmetric with risk outcomes and sensitive to time horizons.
- Coordinate with Risk Management Committee to link compensation to ICAAP and capital retention.
- Review and update policy by April 1, 2023, for all applicable NBFCs except Base Layer and government-owned.
Who it affects
All NBFCs under Scale Based Regulatory framework (excluding Base Layer and government-owned), Key Managerial Personnel (KMPs) of NBFCs, Senior management of NBFCs, Nomination and Remuneration Committees (NRCs), Risk Management Committees (RMCs)
Which NBFCs are exempt from these guidelines?
NBFCs categorized under the 'Base Layer' and government-owned NBFCs are exempt from these compensation guidelines.
What is the effective date of these guidelines?
The guidelines come into effect from April 1, 2023.
What are the key components of the compensation policy required?
The policy must include a Remuneration Committee, principles for fixed/variable pay structures, and malus/clawback provisions.