Reserve Bank of India (Local Area Banks – Governance) Directions, 2025

Document text

RBI/DOR/2025-26/225 DoR.HGG.GOV.No.144/29.67.001/2025-26 November 28, 2025 Reserve Bank of India (Local Area Banks - Governance) Directions, 2025 Table of Contents Chapter I - Preliminary A. Short title and commencement B. Applicability C. Definitions Chapter II – Constitution of Board and Appointment of Directors Chapter III – MD&CEO, Part-time Chairman and Whole-time Directors Chapter IV – Role of the Board and Individual Directors Chapter V – Calendar of Reviews and Board Meeting Procedures Chapter VI – Committees of the Board A. Nomination and Remuneration Committee B. Audit Committee of the Board Chapter VII – Remuneration of NEDs, WTDs, MD&CEO, Material Risk Takers, and Control Function staff Chapter VIII – Regulatory approvals and Reporting Chapter IX – Repeal and other provisions Annex I Annex II Annex III Annex IV Annex V Annex VI In exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949 and all other provisions / laws enabling the Reserve Bank of India (‘RBI’) in this regard, RBI being satisfied that it is necessary and expedient in the public interest so to do, hereby issues the Directions hereinafter specified. Chapter-I Preliminary A. Short title and commencement 1. These Directions shall be called the Reserve Bank of India (Local Area Banks- Governance) Directions, 2025. 2. These Directions shall come into force with immediate effect. B. Applicability 3. These Directions shall be applicable to Local Area Banks (hereinafter collectively referred to as 'banks' and individually as a 'bank'). C. Definitions 4. In these Directions, unless the context states otherwise, the terms herein shall bear the meanings assigned to them below: (1) ‘Chairperson’ means the Part-time Chairman of the Board of Directors of a bank. (2) ‘Clawback’ means a contractual agreement between the employee and the regulated entity in which the employee agrees to return previously paid or vested remuneration to the entity under certain circumstances. (3) ‘Company’ means a company registered under Section 3 of the Companies Act, 1956 or the corresponding provision under the Companies Act, 2013. (4) ‘Director’ means a director appointed on the Board of a bank. (5) ‘Independent Director’ shall be as defined in Section 149(6) of the Companies Act, 2013. (6) ‘Malus’ means an arrangement that permits a bank to prevent vesting of all or part of the amount of a deferred remuneration. Malus arrangement does not reverse vesting after it has already occurred. (7) ‘Relative’ shall have the meaning assigned to it under clause 77 of Section 2 of the Companies Act, 2013. (8) ‘Retention period’ means the period of time after the vesting of instruments which have been awarded as variable pay during which they cannot be sold or accessed. (9) ‘Substantial interest’ shall have the same meaning as assigned to it in Section 5(ne) of the Banking Regulation Act, 1949 5. All other expressions, unless defined herein, shall have the same meaning as have been assigned to them under the Reserve Bank of India Act, 1934 or the Banking Regulation Act, 1949 or the Companies Act, 2013 and Rules made thereunder, or any statutory modification or re-enactment thereto, or Glossary of Terms published by RBI or as used in common or commercial parlance, as the case may be. Chapter-II Constitution of Board and Appointment of Directors 6. A bank shall undertake a process of due diligence at the time of appointment / re-appointment to determine the suitability of the person for appointment / continuing to hold appointment as a director on the Board, based upon qualification, expertise, track record, integrity and other 'fit and proper' criteria. For this purpose, the bank shall obtain necessary information and ‘Declaration & Undertaking’ from the proposed / existing directors in the format enclosed at Annex I . 7. The aforementioned declarations shall be scrutinized by the Nomination and Remuneration Committee (NRC), constituted in terms of paragraph 22 of these Directions, which shall, based on the information provided in the signed declaration, decide on the acceptance and may make references, where considered necessary to the appropriate authority / persons, to ensure their compliance with the requirements indicated. Provided that, (i) while due diligence of directors other than the members of the NRC shall be carried out by the NRC, due diligence in respect of the members of the NRC shall be carried out by the Board itself and the members of the NRC (being interested parties) shall not be involved in this; and (ii) if a member of the NRC has either proposed or seconded the name of a person for appointment as a director on the bank’s Board, such a member of the NRC shall not be a part of the exercise of conduct of due diligence in respect of the person proposed to be appointed as a director. In all such cases, the bank’s Board shall nominate another director, as a temporary member of the NRC, to conduct the exercise of due diligence in respect of the person proposed to be appointed as a Director on the bank’s Board. 8. Broad 'fit and proper’ norms for directors shall include formal qualification, experience, track record, integrity etc. Additionally, a bank shall adhere to the following criteria to determine the 'fit and proper' status of the proposed candidates for independent / Non-Executive Directors (NEDs): (i) Age: The upper age limit for NEDs, including the Chair of the Board, shall be 70 years and after attaining the age of 70 years no person can continue in these positions. (ii) Experience and field of expertise – In accordance with Section 10A(2)(a) of the Banking Regulation Act, not less than 51 per cent of the total number of members of the Board of Directors of a banking company shall consist of persons who shall have special knowledge or practical experience in respect of one or more of the following areas, namely: (a) Accountancy (b) Agriculture and rural economy, (c) Banking, (d) Co-operation, (e) Economics, (f) Finance, (g) Law, (h) Small-scale industry, (i) Information Technology, (j) Payment & Settlement Systems, (k) Human Resources, (l) Risk Management, (m) Business Management, and (n) any other matter the special knowledge of, and practical experience in, which would, in the opinion of RBI, be useful to the bank. Provided that out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, cooperation or small scale industry. (iii) Substantial interest and other restrictions - In accordance with Section 10A(2)(b) of the Banking Regulation Act, not less than 51 per cent of the total number of members of the Board of Directors of a banking company shall consist of persons, who shall not: (a) have substantial interest in, or be connected with, whether as employee manager or managing agent in any company, not being a company registered under Section 25 of the Companies Act, 1956 or the corresponding provision under the Companies Act, 2013, or any firm which carries on trade, commerce or industry and which in either case is not a small-scale industrial concern (b) be proprietors of any trading, commercial or industrial concern, not being a small-scale industrial concern (iv) As a matter of desirable practice, not more than one member of a family or a close relative or an associate (partner, employee, director, etc.) may be on the Board of a bank. (v) Tenure - The total tenure of an NED, continuously or otherwise, on the Board of a bank, shall not exceed eight years. After completing eight years on the Board of a bank the person may be considered for re-appointment only after a minimum gap of two years. This will not preclude them from being appointed as a director in another bank subject to meeting the requirements. Provided that, the minimum gap of two years to be observed before reappointment be reduced to 6 months in respect of the following directors: (a) The directors on the Board of the bank who are directors of the promoter companies [appointed in terms of Section 16(1A)] which amongst themselves are entitled to exercise voting rights in excess of 20 per cent of the total voting rights of the banking company; (b) the original promoter directors of the banking company who individually hold more than 20 per cent of the shareholding of the banking company; and (c) the directors who have acquired subsequently more than 20 per cent of equity of the banking company with prior approval of RBI. 9. A bank shall obtain from a director: (i) a Deed of Covenant executed in the format enclosed at Annex II as on March 31 of every year; (ii) a simple declaration as on March 31 every year to the effect that the information already provided by such person has not undergone any change; Provided that, where there is change in the information provided earlier, the bank shall obtain requisite details from the director/s forthwith. An annual certificate of the bank having undertaken such continuing due diligence shall be submitted to RBI. Chapter-III MD&CEO, Part-time Chairman and Whole-time Directors 10. A bank shall have a Part-time Chairman of the Board of Directors and a separate Managing Director / Managing Director & Chief Executive Officer (MD&CEO) who shall be responsible for day-to-day management of the bank. 11. No person shall continue as the MD&CEO or WTD of a bank beyond the age of 70 years. Within the overall limit of 70 years, as part of its internal policy, an individual bank's Board is free to prescribe a lower retirement age for the WTDs, including the MD&CEO. Chapter-IV Role of the Board and Individual Directors 12. A bank shall conduct its affairs in such ways that it remains wholly solvent, adequately liquid and reasonably profitable. Additionally, it shall ensure that its Memorandum and the Articles of Association are in conformity with extant statutory and regulatory instructions. 13. The Board of a bank needs to set and enforce clear lines of responsibility and accountability for itself as well as the senior management and throughout the organization. 14. A bank shall institutionalise discussions between its management and the Board on quality of internal control systems. The Board shall specifically pay attention to creating and sustaining a culture of control. 15. The non-executive directors (NEDs) of a bank shall address themselves to policy formulations, performance appraisal and proper arrangements for implementation of decisions of the Board and its Committees leaving the operational aspects to the care of MD&CEO and other executives. Some of the important areas on which the NEDs shall bestow particular attention are compliance with monetary and credit policy of RBI / Government, observance of Cash Reserve and Statutory Liquidity Ratio, efficient management of funds and profitability, overall sectional deployment of funds, performance budgeting, housekeeping particularly reconciliation of inter-office accounts, customer service, vigilance, avoidance of frauds and development of a good system of management information and monitoring. 16. A NED of a bank shall not only take interest in the bank’s work concerning their own fields of specialisation / activity but also deliberate on all matters of general policy affecting the bank’s functioning including those concerning the staff. In other words, every NED is expected to function in a manner most conducive to the interests of the depositors, of the shareholders and of the nation as a whole. 17. In the context of what has been stated hereinbefore, a NED, in the discharge of their duties, shall observe the following: (i) a NED is not an employee of the bank. (ii) a NED as an individual, shall have no power to act on behalf of the bank nor can they give any direction to the employees of the bank on behalf of the management. A NED shall desist from sending any instructions to the individual officers on any matters and such cases, if any, shall be routed through the MD&CEO of the bank. Further, if any information is required for the purpose of taking a decision or reviewing the situation at the Board level, it shall be sought from the management. (iii) unless specifically authorised by a Board resolution, a NED shall exercise power only as a member of a collective body, sitting along with others on the Board of Directors. An individual director or a Committee of the Board may be authorised by the Board to finally decide any matter or make recommendations thereon to the Board. (iv) a NED shall act with the amount of care and prudence which an ordinary person is expected to take in their own business. (v) a NED who is directly or indirectly concerned or interested in any contract, loan, arrangement or proposal entered into or proposed to be entered by or on behalf of the banking company shall, as soon as possible after the relevant circumstances have come to their knowledge, disclose the nature of their interest to the Board when any such contract, loan, arrangement or proposal is discussed. Unless their presence is required by the other directors for the purpose of eliciting information, no NED, so required to be present, shall vote on any such contract, loan, arrangement or proposal. (vi) a NED shall not sponsor any individual proposal, nor shall they approach directly the Branch Managers to sanction loans or other facilities to any constituent. While sanction of individual loan application, determining credit worthiness etc. shall be the job of the technical experts i.e. the bank executives, in examining individual credit proposals, a NED shall carefully analyse the state of health of the concerned units by observing the cash flow position and appropriate action taken to ensure that the position of the unit does not deteriorate and the funds get locked up. (vii) a NED shall not sponsor individual cases of employees or officers regarding their recruitment, transfers, promotions, postings and other related matters. If they have any specific complaint against an individual employee, they shall be taken up and brought to the notice of the MD&CEO and not any officer below them. (viii) a bank and its directors, officers, etc. shall observe, except as otherwise required by law, the practices and usages customary among bankers, and in particular, not divulge any information relating to or to the affairs of its constituents except in circumstances in which it is, in accordance with law or practices and usages customary among bankers, necessary or appropriate for the banking company to divulge such information. 18. A NED on the Board of a bank shall perform their role in such a manner as to assist the Chairman and strengthen the management to bring about qualitative and quantitative improvement in the working of the bank. In this connection, the NEDs shall ensure adherence to the following illustrative, but not exhaustive, list of DO'S and DONT'S: (i) DO'S : A NED shall (a) attend the Board meetings regularly and effectively; (b) study the Board papers thoroughly and use the good offices of the Chief Executive for eliciting any information at the Board meeting; (c) ask the management to furnish the Board papers and follow-up reports on a definite time schedule; (d) be involved thoroughly in the matter of formulation of general policy and also ensure that performance of the bank is monitored adequately at Board levels; (e) be familiar with the broad objectives of the bank and the policy laid down by the Government and RBI; (f) offer constructive ideas for the better management of the bank and for making valuable contribution; (g) work as a team and not sponsor or be prejudiced against individual proposals. The management on its part shall furnish full facts and complete papers in advance; (h) offer as much of wisdom, guidance and knowledge as possible to the management; and (i) analyse the trends of economy, assist in the discharge of management's responsibility to public and formulation of measures to improve customer service and, be of constructive assistance to the bank management. (ii) DONT'S : a NED shall not (a) send any instruction to any individual officer of the bank or give direction to individual officer in any matter; (b) involve themselves in any matter relating to personnel administration whether it is appointment, transfer, posting or promotion or a redressal of individual grievances of any employee; (c) interfere in the day-to-day functioning of the bank; (d) involve themselves in the routine or everyday business and in the management functions; (e) approach or influence for sanction of any kind of facility from an individual Branch Manager or any other official; (f) sponsor any loan proposal, buildings and sites for bank's premises, enlistment or empanelment of contractors, architects, doctors, lawyers, etc or do anything which will interfere with and / or be subversive of maintenance of discipline, good conduct and integrity of the staff. (g) participate in the Board discussion if a proposal in which they are directly or indirectly interested comes up for discussion. They shall disclose their interest well in advance to the MD&CEO (h) call for papers / files / notes recorded by various departments for scrutiny etc. in respect of agenda items to be discussed in the meetings. All information / clarification that they may require for taking a decision shall be made available by the management. (i) reveal any information relating to any constituent of the bank to anyone as they are under oath of secrecy and fidelity. To ensure confidentiality of the bank's agenda papers / notes, it is suggested that by way of abundant precaution, the Board papers may be returned to the bank after the meeting; (j) send for individual officers of the bank or give directions to such officers on any matter; (k) encourage an individual employee or union to approach them in any matter; (l) display the logos or distinctive design of the bank on their visiting card / letter head. They may indicate their directorship of the bank on their visiting card or letter heads. 19. MD&CEO / WTDs shall exercise such powers and discharge such duties as may be delegated to them by the Board. 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. It is they who interpret the policy decided upon by the Board to the employees of the bank and issue instructions in pursuance of the Board's policies and ensure that these instructions are carried out. Chapter-V Calendar of Reviews and Board Meeting Procedures 20. A bank shall determine the Board agenda items and the periodicity thereof, with the approval of their Boards, such that there is adequate focus on matters of strategic and financial importance, including the seven broad themes indicated below: Category Description Business Strategy Development of new products Competitiveness of individual businesses Business reviews in relation to targets. Risk Policies concerning credit, operational, market, liquidity risks Assessing the independence of the risk function. Financial Reports and their integrity Detailed scrutiny of quarterly and annual financial results; NPA management and Integrity of reported NPA and provisioning Compliance Regulatory requirements Adherence to RBI and SEBI norms Observations from the annual financial inspection by RBI and from the Long Form Audit Report Review of decisions in previous minutes of meetings, and key decisions within subsidiaries Review of action taken reports Appointments to Board committees Customer Protection Mis-selling, particularly third-party products Laying down the appropriateness of products to different customer segments Understanding the broad trends and concentration in the growth of customer grievances and their resolution Financial Inclusion Review of priority sector lending; Payments for the disadvantaged; Deposit mobilization from weaker sections Support to microfinance institutions and other issues Human Resources Appointments and approvals of directors Perks and perquisites for employees, Incentive schemes for employees Promotion policies for employees Training and skill development of employees 21. A bank shall place before its Board, copies of all directives/circulars and other important communications from RBI and the Government along with adequate background and supplementary information of the policies and instructions sought to be conveyed in the said circulars. Chapter-VI Committees of the Board A. Nomination and Remuneration Committee 22. The board of directors of bank shall constitute a ‘Nomination and Remuneration Committee’ (NRC) of the board comprising three or more non-executive directors, out of which not less than one-half shall be independent directors and shall include at least one member from Risk Management Committee of the board (RMCB). B. Audit Committee of the Board 23. A bank shall refer to Circulars DoS.No.5/16.13.100/94 dated April 09, 1994; DOS.No.BC.14/Admn./919/16.13.100/95 dated September 26, 1995; DoS.No.BC.18/08.91.020/96 dated September 23, 1996; and DBS.ARS.BC.No.4/08.91.020/2010-11 dated November 10, 2010 containing instructions on the constitution, functions, and review mechanisms of the Audit Committee of the Board (ACB). Chapter-VII Remuneration of NEDs, WTDs, MD&CEO, Material Risk Takers, and Control Function staff 24. A bank may pay its NEDs remuneration in the form of: (i) sitting fees and travelling / halting allowance i.e. expenses related to attending meetings of the Board and its committees which shall be fixed with the approval of the Board subject to compliance with the extant statutory provisions. It is clarified that a bank need not approach RBI for approval under Section 35B of the Banking Regulation Act, 1949 in this regard; and (ii) fixed remuneration not exceeding ₹30 lakh per annum for an NED, other than the Chair of the Board. For this purpose, the bank shall set suitable criteria, such that the fixed remuneration is commensurate with an individual director's responsibilities and demands on time and are considered sufficient to attract qualified competent individuals. Explanation: The Board of a bank may fix a lower amount within the ceiling limit of ₹30 lakh per annum depending upon the size of the bank, experience of the NED and other relevant factors. 25. A bank’s compensation policies and practices in respect of WTDs, MD&CEO, Material Risk Takers (MRTs), and Control Function staff shall be in accordance with the Guidelines set out in paragraph 26, and the Basel Committee on Banking Supervision (BCBS) Methodologies detailed in paragraph 27 of these Directions. 26. Guidelines : a bank shall implement necessary policies or systems to ensure adherence to the guidelines delineated below which are based on the FSB Principles for Sound Compensation Practices and their Implementation Standards , as well as current statutory and regulatory framework in India. (1) Guideline 1: Compensation Policy A bank shall formulate and adopt a comprehensive compensation policy covering all its employees and conduct annual review thereof. The policy shall cover all aspects of the compensation structure such as fixed pay, perquisites, performance bonus, guaranteed bonus (joining / sign-on bonus), severance package, share-linked instruments e.g. Employee Stock Option Plan (ESOPs), pension plan, gratuity, etc., taking into account these Guidelines. (2) Guideline 2: NRC The NRC of the Board of a bank shall oversee the framing, review and implementation of compensation policy of the bank on behalf of the Board. The NRC shall work in close coordination with RMCB, to achieve effective alignment between compensation and risks. The NRC shall also ensure that the cost/income ratio of the bank supports the compensation package consistent with maintenance of sound capital adequacy ratio. (3) Guideline 3: For WTDs / MD&CEO / MRTs A bank shall ensure that for the WTDs / MD&CEO / MRTs: (i) compensation is adjusted for all types of risks, (ii) compensation outcomes are symmetric with risk outcomes, (iii) compensation payouts are sensitive to the time horizon of the risks, and (iv) the mix of cash, equity and other forms of compensation are consistent with risk alignment. A wide variety of measures of credit, market, liquidity and various other risks shall be used by a bank in implementation of risk adjustment. The risk adjustment methods may preferably have both quantitative and judgmental elements. The compensation shall also be in compliance with all statutory requirements. The compensation structure for the WTDs / MD&CEO / MRTs of a bank shall be as under: (i) Fixed Pay and Perquisites: A bank shall ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors including adherence to statutory requirements and industry practice. All the fixed items of compensation, including the perquisites, shall be treated as part of fixed pay. It may be noted that all perquisites that are reimbursable shall also be included in the fixed pay so long as there are monetary ceilings on these reimbursements. Contributions towards superannuation / retiral benefits shall be treated as part of fixed pay. (ii) Variable Pay (a) Composition of Variable Pay: The variable pay may be in the form of share-linked instruments [including Cash-linked Stock Appreciation Rights (CSARs)], or a mix of cash and share-linked instruments. There shall be proper balance between the cash and share-linked components in the variable pay. Only in cases where the compensation by way of share-linked instruments is not permitted by law / regulations, the entire variable pay may be in cash. (b) Limit on Variable Pay: It shall be ensured that there is a proper balance between fixed pay and variable pay. In this respect, the bank shall ensure that: i. In accordance with FSB Implementation Standards, read with sub-point (iv) of this subparagraph and BCBS stipulation furnished in paragraph 27(i), a substantial proportion of compensation i.e., at least 50 per cent, shall be variable and paid on the basis of individual, business-unit and firm-wide measures that adequately measure performance, except in cases mentioned in sub-point (ii) of this subparagraph and guideline (4). At higher levels of responsibility, the proportion of variable pay shall be higher. The total variable pay shall be limited to a maximum of 300 per cent of the fixed pay (for the relative performance measurement period). ii. In case variable pay is up to 200 per cent of the fixed pay, a minimum of 50 per cent of the variable pay; and in case variable pay is above 200 per cent, a minimum of 67 per cent of the variable pay shall be via non-cash instruments. iii. In the event that an executive is barred by statute or regulation from grant of share-linked instruments, their variable pay shall be capped at 150 per cent of the fixed pay, but shall not be less than 50 per cent of the fixed pay. iv. The deterioration in the financial performance of the bank shall generally lead to a contraction in the total amount of variable compensation, which may even be reduced to zero. (c) Deferral of Variable Pay: i. For senior executives, including WTDs, and other employees who are MRTs (see guideline (6) below), in adherence to FSB Implementation Standards, deferral arrangements shall invariably exist for the variable pay, regardless of the quantum of pay. For such executives of a bank, a minimum of 60 per cent of the total variable pay shall be under deferral arrangements. Further, if cash component is part of variable pay, at least 50 per cent of the cash bonus shall also be deferred. ii. However, in cases where the cash component of variable pay is under ₹25 lakh, deferral requirements may not be necessary. (d) Period of Deferral Arrangement: The deferral period shall be a minimum of three years. This shall be applicable to both the cash and non-cash components of the variable pay. (e) Vesting: Deferred remuneration shall either vest fully at the end of the deferral period or be spread out over the course of the deferral period. The first such vesting shall not be before one year from the commencement of the deferral period. The vesting shall be no faster than pro rata arrived on a cumulative basis. Additionally, vesting shall not take place more frequently than on a yearly basis to ensure a proper assessment of risks before the application of ex post adjustments. Explanation: ‘No faster than pro rata basis’ means vesting shall not be frontloaded. In other words, if the deferral arrangement is three years, not more than 33.33 per cent of the total granted ESOPs should vest at the end of first year. Further, not more than 66.67 per cent of total granted ESOPs should vest at the end of second year. (f) Share-linked Instruments: Such instruments shall be included as a component of variable pay. Norms for grant of share-linked instruments shall be framed by a bank in conformity with relevant statutory provisions and should form part of the bank’s compensation policy. The details of share-linked instruments granted shall also be disclosed in terms of the disclosure requirements stipulated in the Reserve Bank of India (Local Area Banks: Financial Statements - Presentation and Disclosures) Directions, 2025 . Share-linked instruments shall be fair valued on the date of grant by the bank using Black-Scholes model. The fair value thus arrived at shall be recognised as an expense beginning with the accounting period for which approval has been granted. (g) Malus / Clawback i. The deferred compensation shall be subject to malus / clawback arrangements in the event of subdued or negative financial performance of the bank and / or the relevant line of business in any year. ii. A bank shall put in place appropriate modalities to incorporate malus / clawback mechanism in respect of variable pay, taking into account Supplementary Guidance issued by FSB in March 2018 on use of compensation tools to address misconduct risk, and all relevant statutory and regulatory stipulations, as applicable. A bank shall identify a representative set of situations in their Compensation Policies, which require it to invoke the malus and clawback clauses that may be applicable on entire variable pay. When setting criteria for the application of malus and clawback, a bank shall also specify a period during which malus and / or clawback can be applied, covering at least deferral and retention periods. iii. Wherever the assessed divergence in bank’s provisioning for Non-Performing Assets (NPAs) or asset classification exceeds the prescribed threshold for public disclosure in terms of Reserve Bank of India (Local Area Banks: Financial Statements - Presentation and Disclosures) Directions, 2025 , a bank shall not pay the unvested portion of the variable compensation for the assessment year under ‘malus’ clause. Further, in such situations, no proposal for increase in variable pay (for the assessment year) shall be entertained. In case the bank’s post assessment Gross NPAs are less than 2.0 per cent, these restrictions shall apply only if criteria for public disclosure are triggered either on account of divergence in provisioning or both provisioning and asset classification. (h) Guaranteed Bonus: Guaranteed bonus is not consistent with sound risk management or the ‘pay for performance’ principles and shall not be part of the compensation plan. Therefore, guaranteed bonus shall only occur in the context of hiring new staff as joining / sign-on bonus and be limited to the first year. Further, joining / sign-on bonus shall be in the form of share-linked instruments only, since upfront payments in cash would create perverse incentives. Such bonus will neither be considered part of fixed pay nor part of variable pay. Further, a bank shall not grant severance pay other than accrued benefits (gratuity, pension, etc.) except in cases where it is mandatory under any statute. (i) Hedging: A bank shall not permit employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement. To enforce the same, a bank shall establish appropriate compliance arrangements. (4) Guideline 4: For risk control and compliance staff Members of staff engaged in financial and risk control, including internal audit, shall be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management’s influence on incentive compensation. Back office and employees in the risk control function play a key role in ensuring the integrity of risk measures. If their own compensation is significantly affected by short-term measures, their independence may be compromised. If their compensation is too low, the quality of such employees may be insufficient for their tasks and their authority may be undermined. The mix of fixed and variable compensation for control function personnel shall be weighted in favour of fixed compensation. Therefore, the requirement of minimum 50 per cent of total compensation to be paid in the form of variable pay shall not be applicable for this category of staff. However, a reasonable proportion of compensation shall be in the form of variable pay, so that exercising the options of malus and / or clawback, when warranted, is not rendered infructuous. Subject to the above, while devising compensation structure for such staff, a bank shall adopt principles similar to principles enunciated for WTDs / MD&CEO, as appropriate. (5) Guideline 5: For other categories of staff While these Guidelines do not apply to bank’s staff other than WTDs / MD&CEO / MRTs and Control Function Staff, a bank may adopt similar principles, with suitable modifications, as appropriate for them as well. (6) Guideline 6: Identification of MRTs of the bank A bank shall identify its MRTs whose actions have a material impact on the risk exposure of the bank, and who satisfy the qualitative and any one of the quantitative criteria given below: (i) Standard Qualitative criteria: Relate to the role and decision-making power of staff members (e.g., senior manager, member of management body) having jointly or individually, the authority to commit significantly to risk exposures, etc. (ii) Standard Quantitative Criteria: (a) Their total remuneration exceeds a certain threshold; the determination of which may be done prudently by the bank, or (b) They are included among the 0.3 per cent of staff with the highest remuneration in the bank, or (c) Their remuneration is equal to or greater than the lowest total remuneration of senior management and other risk-takers. A bank shall refer to the BCBS report titled ‘ Range of Methodologies for Risk and Performance Alignment of Remuneration ’ published in May 2011 to enhance its understanding of risk-adjusted remuneration. (7) Guideline 7: Disclosure A bank shall make disclosure on remuneration of WTDs / MD&CEO / MRTs on an annual basis at the minimum, in their Annual Financial Statements as prescribed in Reserve Bank of India (Local Area Banks: Financial Statements – Presentation, Disclosures and Reporting) Directions, 2025 , as amended from time to time. (8) The aforementioned guidelines cover the principles of effective governance of compensation (Guidelines 1 and 2) and effective alignment of compensation with prudent risk taking (Guidelines 3 to 7). With respect to the principle of regulatory and supervisory approval / oversight, it is reiterated that: (i) in terms of the Section 10(1)(b)(iii) of the B.R. Act, 1949, no banking company shall employ or continue the employment of any person whose remuneration is, in the opinion of RBI, excessive; (ii) a bank operating in India is required to obtain regulatory approval for grant of remuneration to WTDs / MD&CEO in terms of Section 35B of the B.R. Act, 1949; and (iii) a bank’s compensation policy shall also be subject to supervisory oversight including review under Basel framework. Deficiencies observed in this regard shall have the effect of increasing the risk profile of the bank with attendant consequences, including a requirement of additional capital if the deficiencies are very significant. 27. BCBS Methodologies for risk and performance alignment of remuneration: The BCBS in consultation with the FSB had published a report in May 2011 titled ‘Range of Methodologies for Risk and Performance Alignment of Remuneration’. The main objectives of the report are (a) to present certain remuneration practices and methodologies that support sound incentives; and (b) the elements influencing the effectiveness of risk alignment that should be considered by banks when developing their methodologies as well as by supervisors, when reviewing and assessing banks’ practices; according to which: (i) A bank shall ensure that the variable part of remuneration is truly and effectively variable and may even be reduced to zero, in line with the symmetry principle defined by the FSB. A bank shall be able to demonstrate to supervisors that the methodologies used to adjust variable remuneration to risk and performance are appropriate to its specific circumstances; (ii) The methodologies adopted by a bank for aligning remuneration with risk and performance shall be consistent with its general risk management and corporate governance framework. (iii) Performance measures and their relation to remuneration packages shall be clearly defined at the beginning of the performance measurement period to ensure that the employees of a bank perceive the incentive mechanism. The usual annual determination of bonus shall be based on rules, processes and objectives known in advance, although some degree of discretion may be retained. (iv) A bank shall use a combination of financial and non-financial measures to assess employee performance and adapt the measurement to each employee’s specific situation. Qualitative factors viz., knowledge, skills and abilities may be considered, particularly where these serve to reinforce the bank’s risk management goals. (v) The nature and extent to which risk adjustments are needed in remuneration shall depend on the extent to which performance measures capture risks. In all cases, risk adjustment shall be made, given that remuneration is often awarded before the final outcome of an activity is known. A bank shall estimate risks ex ante and monitor outcomes ex post, with both influencing the final payouts. (vi) Risk adjustments shall take into account the nature of the risks involved and the time horizons over which they may emerge. The impact of remuneration adjustments shall be linked to actions taken by employees and / or business units, and their impact on the level of risk taken on by the bank. (vii) A bank shall carefully consider the nature of the award process, which links the variable remuneration of each individual employee with bonus pools and the total amount of variable remuneration at a bank’s level, as it directly influences how and when performance and risk adjustment are or may be used. Chapter-VIII Regulatory approvals and Reporting 28. A bank shall seek prior approval of RBI for the following purposes by submitting corresponding information and documents through the Pravaah Portal ( https://pravaah.rbi.org.in ): (i) Amendment of a provision relating to the appointment or re-appointment or termination of appointment or remuneration of MD&CEO or any other Director - Form ‘A’ in Annex III . (ii) Appointment or re-appointment of Chairman or WTD or MD&CEO (by whatever name called) - Form ‘B’ in Annex IV along with ‘Declaration and Undertaking’ from candidate(s), and the remarks of NRC of having satisfied itself that the information is true and complete. Provided that, (a) A proposal for appointment of a new MD&CEO shall invariably contain a panel of at least two names in the order of preference and shall be submitted to RBI at least four months before the expiry of the term of office of the present incumbent. (b) A proposal for re-appointment of MD&CEO shall be submitted to RBI at least six months before the expiry of the term of office of the incumbent. 29. A bank shall seek regulatory approval for grant of remuneration (i.e. compensation) to WTDs / MD&CEO in terms of Section 35B of the Banking Regulation Act, 1949. For this purpose, a bank shall submit application through the Pravaah Portal ( https://pravaah.rbi.org.in ) in the format prescribed in Annex V . Provided that the approval process shall involve, inter alia, an assessment of whether the bank’s compensation policies and practices are in accordance with the Guidelines and the BCBS Methodologies set out or detailed in paragraph 26 and paragraph 27 respectively of these Directions. 30. A bank shall obtain regulatory approval regarding remuneration to Part-time Chairman in terms of Section 10B(1A)(i) and 35B of the Banking Regulation Act, 1949 through the Pravaah Portal ( https://pravaah.rbi.org.in ). 31. Any change in the Board composition shall be reported as and when they take place to the Department of Regulation, Central Office, Reserve Bank of India in the format given at Annex VI . 32. A bank shall obtain regulatory approval regarding Additional Roles or Responsibilities of MD&CEO in terms of Section 10B(8) of the Banking Regulation Act, 1949, through the Pravaah Portal ( https://pravaah.rbi.org.in ). 33. A bank proposing to amend its Articles of Association shall obtain prior regulatory approval for such amendment in terms of Section 35B of the Banking Regulation Act, 1949 through the Pravaah Portal ( https://pravaah.rbi.org.in ) before circulating the draft amendments to its shareholders or convening a meeting of the shareholders in this regard. Chapter-IX Repeal and other provisions A. Repeal and saving 34. With the issue of these Directions, the existing Directions, instructions, and guidelines relating to governance of Local Area Banks stand repealed, as communicated vide circular DOR.RRC.REC.302/33-01-010/2025-26 dated November 28, 2025 . The Directions, instructions, and guidelines repealed prior to the issuance of these Directions shall continue to remain repealed. 35. Notwithstanding such repeal, any action taken or purported to have been taken, or initiated under the repealed Directions, instructions, or guidelines shall continue to be governed by the provisions thereof. All approvals or acknowledgments granted under these repealed lists shall be deemed as governed by these Directions. Further, the repeal of these directions, instructions, or guidelines shall not in any way prejudicially affect: (i) any right, obligation or liability acquired, accrued, or incurred thereunder; (ii) any, penalty, forfeiture, or punishment incurred in respect of any contravention committed thereunder; (iii) any investigation, legal proceeding, or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture, or punishment as aforesaid; and any such investigation, legal proceedings or remedy may be instituted, continued, or enforced and any such penalty, forfeiture or punishment may be imposed as if those directions, instructions, or guidelines had not been repealed. B. Application of other laws not barred 36. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations, or directions, for the time being in force. C. Interpretations 37. For the purpose of giving effect to the provisions of these Directions or in order to remove any difficulties in the application or interpretation of the provisions of these Directions, the RBI may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the RBI shall be final and binding. (Manoranjan Padhy) Chief General Manager