Financial Crime World

Directors/CEOs/Material Risk-Takers: Fixed Pay vs Variable Pay

In a recent move, India’s Reserve Bank (RBI) has emphasized the importance of separating the compensation structure of directors, CEOs, and material risk-takers from that of business areas they oversee. The central bank believes that this separation is crucial to ensure financial stability and prevent reckless risk-taking.

Separation of Compensation Structure

The RBI has stated that members of staff engaged in financial and risk control should be compensated independently of the business areas they oversee and commensurate with their key role in the bank. This approach aims to align compensation with risk management and ensure that those responsible for managing risk are incentivized to do so effectively.

AML/KYC Requirements

The Prevention of Money-Laundering Act (PMLA), 2002 provides the legal framework for anti-money laundering (AML) and countering financing of terrorism (CFT) requirements in India. The RBI has issued Know Your Customer (KYC) Directions, which lay down AML/CFT requirements for banks.

  • Each bank must have a KYC policy approved by its board.
  • Banks must implement group-wide programs against money laundering and terror financing, including sharing information required for client due diligence and risk management.
  • Banks must carry out periodic “Money Laundering and Terrorist Financing Risk Assessment” exercises to identify, assess, and mitigate risks.

Depositor Protection Regime

The Deposit Insurance and Credit Guarantee Corporation (DICGC) administers the Deposit Insurance Scheme in India. Deposits up to INR 0.5 million are insured by the DICGC for both principal and interest amount. The premium for deposit insurance is borne entirely by the insured bank.

Bank Secrecy Requirements

The RBI’s KYC Directions also lay down bank secrecy requirements in India, including:

  • Banks must maintain secrecy regarding customer information.
  • Information collected from customers cannot be divulged without express permission.
  • Disclosure of information is permitted only under specific circumstances, such as compulsion of law or duty to the public.

Prudential Regime

India adopted the Basel III Capital Regulations in 2013 and fully implemented them on October 1, 2021. The capital adequacy framework applies to banks at both a consolidated and standalone level. Banks must maintain a minimum Pillar 1 capital-to-risk-weighted assets ratio (CRAR) of 9% on an ongoing basis.

Additionally, banks are required to maintain a cash reserve ratio (CRR) of 4.50% of their total net demand and time liabilities in India. The RBI will review compliance with these requirements as part of its supervisory oversight.