What changed
RBI issued a comprehensive governance direction for Local Area Banks under Section 35A of the Banking Regulation Act, 1949, effective November 28, 2025. It introduces detailed requirements for board composition, director appointments, and committee structures, replacing earlier piecemeal guidelines. Key additions include mandatory clawback and malus provisions for variable pay, and a formal director due diligence process via the Nomination and Remuneration Committee.
What it means for you
Local Area Banks must now follow a stricter governance framework similar to larger banks, with clear fit-and-proper checks for directors and board committees. The clawback and malus rules will impact how variable pay is structured for material risk takers and control function staff. Banks need to update their internal policies and board charters to align with these directions immediately.
What you must do
- Review and update board constitution and director appointment processes to comply with fit-and-proper criteria and Annex I declaration format.
- Ensure Nomination and Remuneration Committee (NRC) and Audit Committee are constituted as per Chapters II and VI.
- Implement clawback and malus clauses in employment contracts for MD&CEO, whole-time directors, material risk takers, and control function staff.
- Align remuneration policies for non-executive directors and variable pay with the new retention period and deferral requirements.
- Submit regulatory approvals and reporting as specified in Chapter VIII within prescribed timelines.
Who it affects
Local Area Banks (LABs), Board of Directors of LABs, MD & CEO and whole-time directors of LABs, Nomination and Remuneration Committee members, Audit Committee members, Material risk takers and control function staff
What is the effective date of these directions?
The directions came into force with immediate effect from November 28, 2025.
Do these rules apply to all Local Area Banks?
Yes, the directions are applicable to all Local Area Banks as defined in the document.
What is the key change regarding director appointments?
Banks must now conduct a formal due diligence process for all directors, using a prescribed declaration format (Annex I), scrutinized by the Nomination and Remuneration Committee.