Why RBI's distancing norms for bank CEOs make sense, but look odd

Why RBI's distancing norms for bank CEOs make sense, but look odd

No sooner did the Reserve Bank of India (RBI) put out its discussion paper on governance in India’s commercial banks, than it became clear that Kotak Mahindra Bank Ltd will be the most-affected if the suggestions become regulations.

The paper proposes to limit the tenure of a promoter managing director (MD) or chief executive officer (CEO) of a bank to 10 years. The tenure of a non-promoter MD or CEO would be limited to 15 years. Uday Kotak has been at the helm for about 17 years, which means he will have to step down soon if the proposals become law.

Kotak Mahindra had taken RBI to court on differences about promoter shareholding caps, but withdrew its petition earlier this year after the two reached a compromise. While a discussion on the tenure of a bank CEO is important, the timing of it is intriguing. “There is a worldwide debate on the ill-effects of long tenures of bank CEOs. But the timing of the paper and RBI’s decision to distinguish between promoter CEOs and non-promoter CEOs does raise questions, especially since it comes on the back of the dispute with Kotak Bank on promoter shareholding norms," said an expert on corporate governance who asked not to be identified.

Yet, while RBI scores poorly on optics, the paper does raise important questions related to bank governance. Indeed, given the governance-related troubles at many Indian banks, one can even argue why the discussion has taken so long.