Furthermore, NBFCs in the "middle" and "upper" levels will now be compensated similarly to senior management in private banks according to recommendations on "Compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs," which were released on April 20, 2022.
For both cash and non-cash components, the RBI requires that a percentage of variable compensation be postponed in order to correspond with the time horizon of related risks.
The Reserve Bank of India has scrutinized payouts to senior management staff at non-banking financial firms in response to a direction it sent to NBFCs operating in the "middle" and "upper" tiers of the scale-based regulatory (SBR) framework.
Leading industry representatives informed Business Standard that the goal of this endeavor is to implement a compensation policy that has been authorized by the board. It includes creating a remuneration committee and providing guidelines for fixed-variable pay structures and claw-back clauses.
The RBI highlights its upcoming regulatory goals in its annual report for FY24. It highlights how the SBR framework, which was introduced on October 22, 2021, will define the roles of key panels in NBFCs, including the audit committee, nomination and remuneration committee, and risk management committee.
The revised standards place a strong focus on the percentage of variable pay in total remuneration, especially at higher organizational levels, where a larger share is advocated. In order to achieve successful incentivization, the RBI emphasizes that variable compensation must be linked to performance measures specified at the beginning of the evaluation period.
Furthermore, the RBI requires that a part of variable compensation be postponed in order to correspond with the duration of related risks. This requirement applies to both cash and non-cash components.
NBFCs are divided into four categories under the SBR framework, which was developed to reduce arbitrage and improve systemic stability: base, medium, upper, and top. As of September 30, 2023, the percentage of total assets held by NBFCs in the base, medium, and higher tiers was 6 percent, 71 percent, and 23 percent, respectively.
The rules pertaining to the "Compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs," which were released on April 20, 2022, level the playing field between the senior management of private banks and NBFCs located in the middle and higher tiers.
On November 20, 2020, the RBI's Internal Working Group (IWG) on criteria for private bank ownership was established. The group suggested allowing significant business houses and industrial enterprises to promote banks. This might open the door for big NBFCs to become banks as they have assets worth more than Rs 50,000 crore.
Large NBFCs are becoming more interested in obtaining banking licenses as the RBI continues to assess the IWG's recommendations, of which 21 have been approved and the remaining are being reviewed. This is particularly true in light of recent events like the merging of HDFC companies.
According to sources, BS is learning that a number of well-known NBFCs are reevaluating their aspirations for bank licenses in light of continuing regulatory changes and shifting economic objectives meant to establish India as a $5 trillion economy.
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