One should chose NBANDS so that a considerable number of empty bands is included in the calculation. As a minimum we require one empty band. VASP will give a warning, if this is not the case.
NBANDS is also important from a technical point of view: In iterative matrix-diagonalization schemes eigenvectors close to the top of the calculated number of vectors converge much slower than the lowest eigenvectors. This might result in a significant performance loss if not enough empty bands are included in the calculation. Therefore we recommend to set NBANDS to NELECT/2 + NIONS/2, this is also the default setting of the makeparam utility and of VASP.4.X. This setting is safe in most cases. In some cases, it is also possible to decrease the number of additional bands to NIONS/4 for large systems without performance loss, but on the other hand transition metals do require a much larger number of empty bands (up to 2*NIONS).
To check this parameter perform several calculations for a fixed potential (ICHARG=12) with an increasing number of bands (e.g. starting from NELECT/2 + NIONS/2). An accuracy of should be obtained in 10-15 iterations. Mind that the RMM-DIIS scheme (IALGO=48) is more sensible to the number of bands than the default CG algorithm (IALGO=8).