RBI’s Corporate Governance Blueprint Aims at Reshaping Bank Boards

– Team Corplaw | corplaw@vinodkothari.com

As a part of the RBI’s recent consolidation exercise, RBI has released Draft Reserve Bank of India (Commercial Banks – Governance) Directions, 2025. This exercise integrates decades of existing circulars into a streamlined framework, enhancing clarity and ease of governance. While primarily a consolidation, the RBI has undertaken extensive clause shifting, reorganisation, and pruning of redundancies to improve accessibility. Further, new provisions have been introduced for Private Sector Banks (PVBs) in line with the Discussion paper on Governance in Commercial Banks in India dated 11th June, 2020 or in alignment with the provisions applicable to Public Sector Banks (PSBs). Below are some of the key highlights from this consolidated framework for PVBs:

1.     Additional disqualifications for Fit and Proper Criteria

The Draft Directions specify additional disqualification conditions for a person proposed to be appointed as a director in a PVB. These include:

1. Common directorship with a Non-Banking Financial Institution (NBFI) or
2. Association of the proposed candidate with such institutions in any other capacity.

The institutions engaged in the following activities are covered by the said restriction:

•  finance,
• investment,
• money lending,
• hire purchase,
• leasing,
• chit / kuri business,
• Mutual funds,
• Asset Management Companies and
• other para-banking companies.

The term “NBFI” has not been used in the Draft Directions, however, taken from the 2020 Discussion Paper. The 2020 Discussion Paper permitted common directorship with NBFIs subject to certain conditions, and defined NBFI as:

Non-banking financial institutions (NBFI) are entities engaged in hire purchase, financing, investment, leasing, money lending, chit/kuri business and other para banking activities such as factoring, primary dealership, underwriting, mutual fund, insurance, pension fund management, investment advisory, portfolio management services, agency business etc.)

The meaning of para banking activities may also be taken from Master Circular on para banking activities.

Under the Draft Directions, the scope of restrictions are as follows:

Point (a) pertaining to common directorships prohibit common directorship with NBFIs, except in case of NBFCs. For NBFCs, the permission with respect to having common directors have been retained, with the conditions as specified in the Part C (ii) of Report of the Consultative Group of Directors of Banks / Financial Institutions (Dr. Ganguly Group) – Implementation of recommendations dated 20th June, 2002.

The scope of restriction under point (b) is wider, and covers association “in any other capacity”. However, directorship is permitted in such cases, subject to compliance with certain conditions, viz.,

• The institution does not enjoy any financial accommodations from the concerned PVB;
• Person does not hold whole time appointment in the institution; and
• The person does not have substantial interest’ in the institution as defined in Section 5(ne) of the Banking Regulation Act, 1949.

Note that the meaning of “institution” itself is vast, and covers, incorporated and unincorporated entities including individuals.

The proposed inclusion is also in partial alignment with the condition specified in fit and proper criteria for PSBs that states:

A person connected with hire purchase, financing, money lending, investment, leasing and other para banking activities shall not be considered for appointment as elected director.

2.     Clarity w.r.t. the role of Board, EDs and NEDs

The 2020 Discussion Paper had elaborate discussion on the role of the board of the banks, primarily drawing reference from the Basel Committee on Banking Supervision Guidelines of 2015, in addition to the existing requirements specified through various circulars.

The Draft Directions further sets out the expectations from the MD/ CEO/ WTDs vis-a-vis NEDs, alongside the role of board.

Para 51 and 52 of the Draft Directions specifies role of the board, which includes:

• Conduct affairs in a solvent, adequately liquid and reasonably profitable manner
• Ensure that the Memorandum and the Articles of Association spell out the duties, functions and obligations of the directors towards the PVB
• Institutionalise discussions between its management and the Board on quality of internal control systems
• Set and enforce clear lines of responsibility and accountability for itself as well as the senior management and throughout the organization.

For NEDs, Para 52 & 53 of the Draft Directions sets out the expectations from the NEDs, including areas that NEDs should pay particular attention to. Para 54 further provides various positive and negative stipulations, some of which are stated below:

Negative stipulations

Positive stipulations

not be an employee of the PVB. have no power to act on behalf of the PVB nor can they give any direction to the employees of the PVB on behalf of the management. desist from sending any instructions to the individual officers on any matters and such cases, if any, shall be routed through the MD&CEO / CEO of the PVB. exercise power only as a member of a collective body, unless specifically authorised by a Board resolution, not sponsor any individual proposal, nor shall they approach directly the Branch Managers to sanction loans or other facilities to any constituent. not sponsor individual cases of employees or officers regarding their recruitment, transfers, promotions, postings and other related matters.

act with ordinary person’s care and prudence disclose the nature of interest to Board wherever directly or indirectly interested or concerned in any contract, loan, arrangement or proposal entered/ proposed to be entered and not to vote on any such proposal [similar to sec. 184 of CA]

As regards CEO & MD/ CEO/ WTDs, Para 56 of the Draft Directions state that they should act as a bridge between the board and management. They are charged with the responsibility of efficient management of the bank on behalf of the Board. It is through them that the programmes, policies and decisions approved by the Board are made effective and again it is through them that the Board gets the responses and reactions of those at various levels of the organisations to its deliberations.

A mapping of the various provisions of the Draft Directions as applicable to PVBs vis-a-vis the existing applicable circular setting out such requirements can be accessed here.