Payouts to to key management personnel at non-banking financial companies have gone under scrutiny of the Reserve Bank of India following its directive issued to NBFCs in the 'middle' and 'upper' layers of the scale-based regulatory (SBR) framework.
Top industry officials told Business Standard that this initiative aims to enforce a board-approved compensation policy, including the establishment of a remuneration committee and guidelines on fixed-variable pay structures and claw-back provisions.
The RBI's annual report for FY24 emphasises its upcoming regulatory goals, highlighting the delineation of roles for key panels, such as the audit committee, nomination and remuneration committee, and risk management committee, in NBFCs, as outlined in the SBR framework introduced on October 22, 2021.
A key aspect of the new guidelines is the emphasis on the proportion of variable pay in total compensation, particularly advocating for a higher proportion at higher organisational levels. The RBI stresses that variable pay must be tied to performance metrics defined at the start of the assessment period to ensure effective incentivisation.
Additionally, the RBI mandates that a portion of variable pay be deferred to align with the time horizon of associated risks, applicable to both cash and non-cash components.
The SBR framework, introduced to prevent arbitrage and enhance systemic stability, categorises NBFCs into four tiers: base, middle, upper, and top. As of September 30, 2023, NBFCs in the base, middle, and upper tiers accounted for respectively 6 percent, 71 percent and 23 percent of total assets.
The guidelines on 'Compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs' issued on April 20, 2022, bring NBFCs in the middle and upper layers on a par with the senior management in private banks.
The RBI's Internal Working Group (IWG) on ownership guidelines for private banks, initiated on November 20, 2020, recommended that large corporate houses and industrial entities be allowed to promote banks. This includes large NBFCs with assets exceeding Rs 50,000 crore, potentially paving the way for their conversion into banks.
As the RBI continues to evaluate the IWG's recommendations, with 21 accepted and others under review, there is growing interest among large NBFCs in pursuing banking licences, especially following recent developments such as the merger of HDFC entities.
Sources suggest BS that several prominent NBFCs are reassessing their ambitions for bank licences amid ongoing regulatory developments and evolving economic goals aimed at positioning India as a $5-trillion economy.
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