Large NBFCs Cannot Remain Exempt From Leadership Tenure Discipline

A recent media report that the Reserve Bank of India is not considering any proposal to cap the tenure of top management in non-banking financial companies has reopened a question that the country will eventually have to confront with greater seriousness than our stock markets may prefer.

The immediate relief visible in certain NBFC counters may have satisfied their investors and PR punters for the time being. It does not resolve the underlying prudential question. On the contrary, it brings into sharper focus a governance asymmetry that is becoming harder to defend as India’s largest NBFCs acquire scale, reach and systemic relevance.

In banks, chief executive appointments require regulatory approval and are subject to fit and proper scrutiny. In NBFCs, boards continue to exercise wider discretion over appointment, tenure and compensation, while private sector banks remain subject to a 15-year cap for non-promoter MDs, 10-year cap for promoter-MD, and an age cap of 70. 

The point is not that NBFCs and banks are identical institutions. They are not. Their liability structures differ, their access to deposits differs, and their formal position within the architecture of regulated finance remains distinct. Yet distinctions of institutional form do not nullify convergences of systemic consequence. Some of India’s top-tier NBFCs have already reached a size and significance comparable to that of mid-sized banks. It is worth noting that several licensed banking categories, often far smaller in scale, are subject to materially higher governance rigour by design. This is so even though the quantum of public deposits in such entities is modest when compared to the scale of banking system exposures, direct and indirect, to large NBFCs.

RBI's own scale-based framework proceeds from the premise that regulatory intensity must rise with size, complexity and interconnectedness, and classifies NBFCs into the Base, Middle, Upper and Top Layers precisely for that reason. Once that philosophy is accepted, it becomes increasingly difficult to justify a governance dispensation under which institutions of such scale may continue to treat leadership tenure as an essentially private matter. 

The Reserve Bank has, over the past decade, demonstrated a consistent willingness to refine its supervisory approach as institutions evolve, often ahead of visible stress.

A Prudential Question
It would be a mistake to reduce this matter to a commentary on individual leaders, however prominent or accomplished. The issue is structural. Very long executive tenure in a financial institution creates a category of risk that regulation has been insufficiently willing to name with clarity. It can soften challenge within the organisation, weaken the board’s appetite for independent judgment, defer the cultivation of successors, and steadily concentrate formal and informal authority in ways that become visible only after they have hardened into habit. The same concern extends beyond the chief executive alone. Long-tail tenure among key managerial personnel across risk, treasury, compliance and business leadership can produce a form of organisational dependence that deserves to be treated as a supervisory variable in its own right.

That is why the question should not be framed merely as one of continuity versus disruption. It is a question of whether institutions entrusted with public consequence are being built to outlast dominant personalities. A regulator that has already learnt, through repeated episodes across jurisdictions, that leadership concentration can coexist with flattering performance should have little difficulty recognising prolonged tenure as part of the risk deck. The point is not to presume failure in every case. The point is to avoid a regulatory philosophy that waits for failure before acknowledging concentration as a source of vulnerability.

Discretion An Incomplete Answer
A central bank may understandably prefer supervisory discretion to hard rules. There is merit in flexibility. Governance weaknesses, key-man risk and succession deficiencies can, in principle, be addressed through inspection, supervisory dialogue, fit and proper expectations and entity-specific intervention. Nor should every weakness in financial governance invite a blunt statutory response.

Yet discretion alone seldom supplies the discipline that entrenched institutions resist most. Boards defer difficult transitions when performance remains attractive. Markets reward continuity when valuations are flattering. Promoter groups and incumbent executives rarely volunteer the dilution of authority when familiarity, influence and wealth creation are aligned in its favour. In a public, listed and valuation-driven financial ecosystem, the incentive to prolong innings at the top is not incidental. It is built into the structure of rewards. That is why industry lobbies will often resist the very ideology of succession planning while continuing to invoke governance in the abstract.

A rule serves a different purpose. It compels preparation in advance. It turns succession from aspiration into obligation. It prevents boards from postponing institutional renewal indefinitely under the cover of near-term market comfort. In governance matters, ambiguity often becomes a silent ally of incumbency. Indian finance has, for long, been too accommodating of extended tenures that quietly substituted for the absence of credible succession. Where institutions have failed to build leadership depth, and extensions have nonetheless followed, it reflects not only board forbearance but also a supervisory hesitation that is better corrected early than explained later.

There is also a structural reality that warrants recognition. For some large NBFC groups, the pathway to banking is neither straightforward nor always available, which can, at the margin, strengthen the incentive to preserve continuity of control within the existing structure. That, in turn, elevates leadership tenure and succession from matters of convenience to questions of prudential balance.

The RBI recognised a cognate principle in banking when it imposed limits on the tenure of private bank CEOs and whole-time directors. The purpose reflected a view that stewardship in finance must remain bounded by institutional principle and that no regulated entity should permit executive continuance to mature into a quasi-proprietary claim over leadership. That judgment does not lose its coherence merely because an institution resides in the NBFC perimeter rather than the banking one. 

Governance Settlement
A more sophisticated regulatory objection would be that tenure caps can become ritualistic. Titles may change while influence remains intact. Formal succession may conceal proxy control. Real authority may continue to reside in the same informal network of promoters, boards, executive committees or long-entrenched lieutenants. That objection is entirely valid. It also points toward the correct policy answer.

Tenure discipline should not be advanced as a stand-alone cure. It belongs within a broader governance settlement for systemically significant NBFCs. The larger concern is the concentration of influence across the institution, not merely the calendar duration of one individual’s leadership. That requires a supervisory framework capable of examining succession depth across major functions, the true autonomy of control roles, the board’s ability to exercise challenge, and the extent to which managerial renewal is substantive rather than ceremonial.

The proper location of this responsibility is also clear. In any regulated financial institution, the board is the first custodian of governance, succession depth and managerial balance. The Reserve Bank’s role is to articulate the prudential expectation and supervise its observance with seriousness. The board’s role is to ensure that leadership continuity does not degenerate into leadership dependence, and that succession is built in substance rather than deferred in convenience.

The international governance literature supports such an approach. The Financial Stability Board has emphasised the centrality of risk governance and board effectiveness in financial institutions, while the G20-OECD Principles place explicit responsibility on the board for CEO succession and, where appropriate, succession for other key executives in order to preserve continuity and resilience. These are part of the architecture through which institutional durability is secured. 

This is also where the broader Indian lesson deserves mention. Private sector banking in India has already furnished more than enough examples of larger-than-life chief executives whose stature, market credibility and longevity often became intertwined with the identity of the institution itself. That history should have made one conclusion uncontroversial by now. Market capitalisation and governance quality are not interchangeable ideas. A rising valuation may testify to business performance, market confidence or leadership charisma. It does not, by itself, answer whether the institution has built replaceability, challenge, succession depth and internal resilience. Prudential supervision, if it is to retain conceptual seriousness, cannot outsource its understanding of governance to the stock market.

The RBI would be justified in setting the tone firmly, while expecting the boards of its regulated entities to give effect to that discipline in both letter and spirit.

Need Demand Resolution
The timing of this debate arises because the Reserve Bank has, in recent years, moved the NBFC sector toward a more mature supervisory architecture. Scale-based regulation already recognises that certain institutions carry externalities of a different order. The Upper Layer and the possibility of a Top Layer exist precisely because size and interconnectedness alter the public consequences of private decisions. A governance framework that remains comparatively permissive at the apex of those institutions risks falling behind the evolution of the regulatory philosophy itself. 

There is an even larger issue at stake. If financial institutions do not build succession layers across the organisation and across functions, then the repeated invocation of governance in regulation begins to sound curiously hollow. Governance cannot mean polished disclosures, periodic committee meetings and the ceremonial repetition of best-practice language. In regulated finance, it must mean the capacity of the institution to transfer authority without strategic dislocation, supervisory anxiety or market panic. It must mean that continuity of stewardship is institutional, not personal.

The Reserve Bank need not impose a one-size-fits-all regime across the entire NBFC landscape. That would neither be necessary nor desirable. But for systemically important entities, especially those in the Upper Layer and any in the Top Layer, a calibrated framework on executive tenure and key managerial continuity would amount to prudential coherence rather than regulatory excess. The framework could be accompanied by board-certified succession plans, supervisory scrutiny of leadership bench strength, and closer examination of whether concentration of influence has merely changed form rather than genuinely receded.

Prudential judgments cannot be outsourced to a chorus in which interested lobbies write the script and parts of the media supply the soundtrack. A regulator charged with systemic stability must remain politely deaf to campaigns that seek to convert private preference into public policy.

In the end, the central bank must resist the temptation to take comfort from the preferences of the market. In finance, continuity will always find eloquent defenders. Boards will invoke stability, investors will invoke value creation, and entrenched interests will invoke experience, all while resisting the institutional disciplines that make leadership renewable. A regulator is required to proceed by a sterner standard. Its task is to ensure that governance serves resilience rather than incumbency. Where power in systemically consequential institutions becomes too prolonged, too personalised and too lightly bounded, prudence requires timely course correction. This is the regulatory fidelity.