Reserve Bank of India (Local Area Banks – Governance) Directions, 2025

1. In force at once

These Directions came into force with immediate effect.

2. Who is covered

These Directions apply to local area banks.

1. Seventy is the ceiling

A non executive director, the chair included, cannot continue past the age of 70.

2. Most seats need experts

At least 51 per cent of the board must have special knowledge in fields like banking, law or agriculture.

3. Eight years, then a break

A non executive director serves at most eight years in total on the board.

4. Two years before returning

After eight years the person may return only after a gap of two years.

5. A shorter gap for promoters

For certain promoter linked directors, the gap falls to 6 months.

6. Fit and proper first

Before a director is appointed, the bank must check their skills, record and integrity.

7. Two rural voices

At least two directors must know agriculture and rural economy, co-operation or small scale industry.

8. Chair and chief separated

The bank must have a part time chairman and a separate chief executive who runs day to day management.

9. The committee screens them

The pay and nominations committee reads each director's declaration closely before it is accepted.

10. Nobody vets themselves

Due diligence on committee members is done by the board itself; interested members stay out.

11. One family seat only

As a desirable practice, not more than one member of a family or close associate sits on the board.

12. A yearly covenant

Every director signs a deed of covenant and refreshes their declaration each year as on March 31.

13. Age seventy for executives

No one continues as chief executive or whole time director past the age of 70.

1. Directors cannot command staff

A non executive director gives no orders to employees; everything routes through the chief executive.

2. No sponsoring loans

A director may not sponsor any loan proposal or push a branch manager to sanction facilities.

3. No staff favours

A director may not push individual cases of recruitment, transfer or promotion.

4. Customers' secrets kept

Directors and officers must not divulge any information about the bank's customers, except as law allows.

5. Solvent, liquid, profitable

The bank must stay wholly solvent, adequately liquid and reasonably profitable.

6. A culture of control

Board and management must discuss the quality of internal controls and sustain a control culture.

7. Interested directors step back

A director interested in a proposal must disclose it and stay out of the vote.

8. Clear lines of duty

The board sets and enforces clear responsibility and accountability, for itself and management.

1. Seven themes on the agenda

The board agenda must cover seven themes: strategy, risk, reports, compliance, customers, inclusion and people.

2. RBI circulars reach the board

Copies of RBI and government directives go before the board with proper background.

1. A pay and names committee

The nominations committee has three or more non executive directors, at least half independent, one from the risk committee.

2. The audit committee stands

The audit committee follows RBI's standing circulars on its constitution, functions and reviews.

1. Directors' pay is capped

A non executive director's fixed pay cannot exceed ₹30 lakh a year, besides sitting fees.

BankPulse example. A non-executive director other than the Chair may be paid a fixed sum of up to ₹30 lakh a year. A board that votes ₹35 lakh has gone past that. The Chair sits outside this paragraph.

2. Half the pay must vary

For top executives at least 50 per cent of pay must be variable, tied to measured performance.

BankPulse example. At least 50 per cent of the pay must be variable. Suppose total pay is ₹80 lakh. Then ₹40 lakh of it or more varies with performance.

3. A cap on variable pay

Total variable pay is capped at 300 per cent of fixed pay.

BankPulse example. Variable pay is limited to a maximum of 300 per cent of fixed pay. Suppose fixed pay is ₹40 lakh. Then variable pay stops at ₹1.2 crore.

4. Most of it waits

At least 60 per cent of an executive's variable pay sits under deferral.

BankPulse example. At least 60 per cent of variable pay is deferred. Suppose variable pay is ₹50 lakh. Then ₹30 lakh waits, and ₹20 lakh may be paid now.

5. Three years of waiting

The deferral period is at least three years.

6. No hedging pay

Employees may not insure or hedge their pay to undo its risk alignment.

7. Naming the risk takers

The bank must identify material risk takers using set qualitative and quantitative tests.

8. Pay can be taken back

Deferred pay faces malus and clawback if the bank or the line of business performs badly.

9. Bad-loan gaps freeze pay

If the bank under reports bad loans beyond the disclosure line, unvested variable pay is withheld.

10. No guaranteed bonus

Guaranteed bonus is allowed only as a joining bonus, in the first year, and only in share linked form.

11. Control staff paid fixed

Risk and audit staff are paid mostly fixed, independent of the businesses they oversee.

1. Two names, four months

A new chief executive proposal carries at least two names and reaches RBI four months before the term ends.

2. Six months for renewal

A re-appointment proposal for the chief executive reaches RBI at least six months before the term ends.

3. Board changes reported

Every change in board composition is reported to RBI as and when it happens.

4. RBI approves the top job

Appointing the chairman, chief executive or a whole time director needs RBI's prior approval through PRAVAAH.

5. Pay needs approval

Executive pay needs RBI approval under the banking law. The test is these very guidelines.

1. Old guidance repealed

The earlier governance circulars for local area banks stand repealed.

2. Old actions stay governed

Action already taken under the old rules stays governed by them.