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The Reserve Bank of India's (“RBI”) Commercial Banks – Governance Directions, 2025 (“Directions”) mark a decisive shift in how Indian banks are expected to approach power, responsibility, and risk. Far from being a mere consolidation of circulars, Directions aim to transform governance from a checklist exercise into an institutional culture rooted in independence, accountability, and an explicit alignment between risk and reward.
A New Architecture of Accountability
The Directions begin by asserting their primacy over earlier governance instructions, bringing public sector banks, private sector banks and foreign banks' Indian operations within a single, harmonised framework. While small finance banks, payments banks, local area banks and regional rural banks are carved out, the document is unambiguous that all other commercial banks1 must treat these norms as the baseline, not the ceiling.
What is striking is the legislative backbone: the Directions invoke powers under the Banking Regulation Act, 19492, the State Bank of India Act, 19553, and the nationalisation statutes4, signalling that governance is no longer a soft-law nudge but a hard-law imperative. By expressly stating that these norms operate “in addition to” other laws, the RBI also pre-empts any argument that company law compliance alone is sufficient.
Boards as Stewards, Not Spectators
For public sector banks, Directions sharpen the Board's mandate into four clear roles: oversight of risk, integrity of controls, expert management and maximisation of stakeholder interests. Directors5 are expected to be familiar with delegation matrices, strategy, organisational structure, control systems and the competitive environment even before they take their seats at the Board table.
The Directions emphasise that Boards must set and enforce “clear lines of responsibility and accountability” for senior management and throughout the organisation, institutionalising regular discussions on the quality of internal controls and “a culture of control”. This language subtly but firmly shifts Boards away from post-facto review towards continuous stewardship.
Independence as a Lived Reality
If Indian banking once tolerated the occasional blurring of roles, the Directions attempt to close these gaps. In public sector banks, the Chair of the Board must be an independent director6, and at least half of the directors attending the Board meeting must be independent. Quorum norms7 are tightened to ensure that independence is not an accidental outcome of attendance but an embedded feature of Board functioning.
For private sector banks, the “fit and proper” requirements for non-executive directors go beyond age and qualifications to examine integrity, criminal and regulatory history, financial position and links to financially interconnected entities. The Directions cap the total tenure of non-executive directors at eight years, with a mandatory three-year cooling-off before possible return, thus addressing the problem of “permanent” independent directors.
Enhanced Board Committee Standards
The Directions are particularly rigorous on-Board committees. Audit Committees8 in public sector banks must consist only of non-executive directors, with at least one member possessing professional financial expertise. Furthermore, the Board Chair cannot sit on the Audit Committee, and the Audit Chair cannot sit on any credit-sanctioning committee.
Similarly, the Risk Management Committee of the Board must have a majority of non-executive directors, be chaired by an independent director who is not the Board Chair and include at least one director with demonstrable risk management expertise. The Nomination and Remuneration Committee is locked down even further: only non-executive directors, a mandatory independent chair, and linkage with the Risk Committee to ensure that pay architecture is not divorced from risk appetite9.
The Empowered Chief Risk Officer
The Directions treat the Chief Risk Officer (“CFO”) as the institutional conscience of the bank's risk-taking. Banks must adopt a Board-approved policy defining the CRO's role, secure the CRO's seniority in the hierarchy and insist on appropriate professional qualifications and experience. The CRO must report directly either to the MD/CEO or the Board Risk Committee, and the committee must meet the CRO at least quarterly without the MD/CEO present, an important safeguard against management capture.
Crucially, the Directions prohibit “dual hatting”: the CRO cannot simultaneously function as CEO, COO, CFO, or internal audit head, nor be given business targets. Where the CRO participates in credit sanction processes, the Directions draw a sharp line between advisory and decision-making roles and impose individual and several responsibilities on all decision-making for the risk dimensions of that credit.
Fit and Proper: From Paper to Practice
On both the public and private bank side, fit and proper scrutiny is deepened and institutionalised. Public sector banks must obtain detailed declarations from elected directors10, including age, qualifications, field of expertise and disqualifications, with the Nomination and Remuneration Committee recording its deliberations as formal minutes.
The disqualification matrix is deliberately broad: prior long stints on Boards of banks and financial institutions, active engagement in moneylending, para-banking or stockbroking, political office, and conflicts involving audit firms all count against candidature. Once elected, directors must execute a Deed of Covenant, make annual declarations of unchanged status and fully disclose directorships, interests and, where relevant, professional client lists.
The Culture of Non-Executive
The Directions contain an unusually granular articulation of what non-executive directors may and may not do in private sector banks. A non-executive director is reminded that they are not an employee, possess no individual authority to direct officers and must act only as part of the collective Board or under explicit delegation.
The “do” list exhorts directors to prepare thoroughly, attend diligently, focus on policy, understand macro-economic trends and contribute constructively to management oversight. The “don't” list, by contrast, reads almost like a catalogue of past abuses: no sponsoring of individual loans, no direct approaches to branch managers, no meddling in transfers and promotions, no use of Bank logos on visiting cards, and strict recusal where conflict exists.
Leadership, Term Limits and Succession
On bank leadership, the Directions embrace term and age limits that have long been debated. In private sector banks, the MD/CEO or whole-time directors cannot serve beyond 70 (seventy) years of age, and the same individual cannot occupy these roles in a given bank for more than 15 (fifteen) years. Where the MD/CEO is also a promoter or major shareholder11, the normal cap is 12 (twelve) years, extendable to 15 (fifteen) years only at the RBI's discretion and subject to progress on promoter stake dilution.
These are not mere numbers. They are governance levers to avoid “key man” institutions, encourage renewal at the top and ensure that promoter-led banks evolve into professionally governed entities over time. The Directions back this up with procedural discipline: proposals for new MD/CEOs must include a panel of at least 2 (two) names and reach the RBI months before the incumbent's term ends, embedding succession planning into regulatory architecture.
Risk, Reward and the Remuneration Reset
Perhaps the most future-facing part of the Directions lies in their treatment of remuneration for whole-time directors, MD/CEOs, material risk takers and control function staff in private sector banks. Compensation policies must be comprehensive, annually reviewed, and explicitly aligned with the Financial Stability Board's Principles and the Basel Committee's methodologies for risk-adjusted pay.
The Directions insist that variable pay be “truly and effectively variable” and even reducible to zero, with performance measures defined ex-ante and adjusted ex-post for all types of risks. They also require banks to identify material risk takers using both qualitative criteria (decision-making power) and quantitative screens (remuneration thresholds and ranking), and to make detailed annual disclosures of remuneration in their financial statements.
Foreign Banks: Same Game, Stricter Rules
For foreign banks operating through wholly owned subsidiaries, Directions apply the private sector bank framework with added localisation. At least two-thirds of directors must be non-executive, at least one-third must be independent of the Indian subsidiary, parent and group entities, and at least half the Board must be Indian nationals, with one-third resident in India. The CEO must be full-time and resident in India, underlying the RBI's insistence on meaningful, locally accountable governance rather than remote control from overseas headquarters.
Foreign banks operating through branches are exempted from some Board-centric provisions but remain bound by the risk-aligned remuneration architecture, either under the FSB framework adopted in their home jurisdiction or, failing that, under the Indian Guidelines in the Directions.
From Directions to Discipline
The Directions close with a repeal-and-savings clause that sweeps away the patchwork of earlier circulars but preserves past actions and approvals, deeming them to continue under the new regime. RBI also reserves the right to issue clarifications and declares its interpretation final, reinforcing the centrality of the regulator's role in shaping governance practice.
For Boards, management and compliance teams, the real challenge now lies not in mapping clauses but in internalising the underlying philosophy: governance as a living system, where independence is designed, conflicts are anticipated, risk is consciously priced into incentives and directors understand that stewardship is as much about character as it is about compliance. In that sense, the Directions do more than connect rules to entities; they attempt to connect regulation to the very ethos of banking.
Footnotes
1. As defined under Sub-sections (c), (da) and (nc) of Section 5 of the Banking Regulation Act, 1949
2. Section 35A of the Banking Regulation Act, 1949.
3. Sub-section (2) of Section 19A of the State Bank of India Act, 1955.
4. Including Sub-section (3AA) & (3AB) of Section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
5. sub-section (c) of Section 19 of the SBI Act/clause (i) of sub-section (3) of Section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 / 1980
6. Section 149(6) of the Companies Act, 2013.
7. Circulars 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.
8. 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.3/08.91.020/96 dated January 20, 1997; DBS.ARS.BC4/08.91.020/2015-16 dated September 24, 2015 and DBS.ARS.BC.01/08.91.020/2017-18 dated July 13, 2017.
9. Circular No. DBOD.No.BP.520/21.04.103/2002-03 dated October 12, 2002.
10. Section 19(c) of the SBI Act, and clause (i) of sub-section (3) of Section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 / 1980.
11. Reserve Bank of India (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
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