Reserve Bank of India (Small Finance 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 small finance banks.

3. Some banks partly exempt

Non scheduled small finance banks are exempt from the chief risk officer and chief financial officer chapters.

1. Age limits for directors

A non executive director must be at least 35 years old and may not continue past 75.

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. No lawmakers on board

A member of Parliament or a state legislature cannot be a director.

4. Eight years, then a break

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

5. Three years before returning

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

6. Fifteen years at the top

Nobody holds the chief executive or whole time director post beyond 15 years.

7. A clean cooling period

During the cooling period the person cannot be associated with the bank or its group in any way.

8. Promoters get twelve years

A promoter or major shareholder in these posts gets 12 years, or 15 only at RBI's sole discretion.

9. Fit and proper first

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

10. Two rural voices

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

11. Chair and chief separated

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

12. Two whole time directors

The board must include at least two whole time directors, counting the chief executive.

13. The committee screens them

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

14. Nobody vets themselves

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

15. One family seat only

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

16. A yearly covenant

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

17. Seventy is the ceiling

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. Interested directors step back

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

5. Four duties of the board

The board watches risk, keeps the controls honest, ensures expert management and guards all stakeholders.

1. An independent chair

The chair of the board must be an independent director, and so must whoever stands in.

2. Quorum with independents

Board meetings need one third of the board or three directors, and half of those attending must be independent.

3. Seven themes on the agenda

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

4. Dissent is recorded

Board minutes must record observations and dissents of individual directors and go back to them for confirmation.

5. RBI circulars reach the board

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

1. The chair stays out

The chair of the board may not sit on the audit committee.

2. Audit chair sanctions nothing

The audit committee's chair may not sit on any committee that sanctions credit.

3. Quarterly audit meetings

The audit committee meets at least once a quarter; two thirds of those attending must be independent.

4. A risk committee too

The board must set up a risk committee. Most of its members are non executive directors.

5. An audit committee of outsiders

The audit committee consists only of non executive directors, with at least one finance expert.

6. Risk chair stands alone

The risk committee is chaired by an independent director who chairs neither the board nor any other committee.

1. No dual hats

The chief risk officer may not also be chief executive, operating, financial or internal audit chief.

2. Removal is reported

Removing the chief risk officer early needs board approval and a report to RBI's supervision department.

3. A chief risk officer

A board approved policy defines the chief risk officer's role, and safeguards protect their independence.

4. No business targets

The chief risk officer reports to the chief executive or the risk committee and carries no business targets.

1. A qualified finance chief

The chief financial officer must be a qualified chartered accountant.

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 small finance banks stand repealed.

2. Old actions stay governed

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