RBI regulations on bank executive compensation lead to unintended consequences

The RBI's regulations on bank executive compensation, aimed at curbing excessive risk-taking and short-term focus, are leading to unintended consequences. Several instances have been reported where the RBI's interference in pay structures has resulted in senior bankers leaving for higher-paying positions elsewhere. The 2008 global financial crisis highlighted the need to address compensation practices at financial institutions, and global bank forums issued guidelines on CEO compensation. Indian banks also came under scrutiny, leading the RBI to enact its own rules in 2019. These rules include linking pay to performance targets, including clawback provisions, and imposing greater personal responsibility on bank CEOs. However, there is concern that such over-regulation may result in the loss of valuable talent, as seen in other countries.