Bank MDs, CEOs face performance reviews, removal for underperformance

The central bank has introduced a performance evaluation framework for bank managing directors (MDs) and chief executive officers (CEOs), requiring them to be assessed every six months covering solvency, asset quality, governance, customer conduct, and profitability.

The Bangladesh Bank issued the Key Performance Indicators (KPIs) Framework today (13 September) and instructed the chairmen of all scheduled banks to comply with the new guidelines.

Under the framework, a bank’s board must formulate a performance plan for a newly appointed MD or CEO at its next meeting and finalise it with Bangladesh Bank’s approval. For incumbents, the first evaluation will cover the period from September to 31 March.

The framework assigns 100 marks across five broad areas: bank solvency and liquidity (25), asset quality (25), governance and internal control (25), inclusion, customer and market conduct (15), and profitability (10).

These areas include nearly 30 indicators, such as the Capital to Risk-Weighted Assets Ratio (CRAR), Net Stable Funding Ratio (NSFR), gross and net non-performing loan (NPL) ratios, return on assets (ROA), regulatory compliance, anti-money laundering and counter-terrorist financing (AML/CFT) compliance, and lending to CMSMEs and the agriculture sector.

Under the new framework, MDs and CEOs will be rated on a 100-point scale. Scores of 75 or above will be classified as “Above Average” (standard performance), 65 to below 75 as “Average”, and below 65 as “Below Average”, requiring immediate improvement.

A senior official of the relevant Bangladesh Bank department told The Business Standard that the central bank may issue warnings to MDs or CEOs who score below 65. It may also remove them from their positions if their performance remains unsatisfactory.

The framework also provides for additional deductions based on performance in six specified areas. If an MD or CEO scores below 50% in all six areas, up to five marks may be deducted from their overall score.

For example, an MD or CEO initially scoring 75.50 could have the score reduced to 70.42 if the maximum deduction of 5.08 marks applies.

NPL-related indicators include the overall NPL ratio, the amount of bad loans, annual cash recovery from defaulted loans and the volume of loans written off.

The framework also assesses the advance-to-deposit ratio (ADR), including how much of a bank’s deposits are disbursed as loans, whether loans are being recovered on time and whether the bank is complying with Bangladesh Bank’s prescribed limits.

Loan concentration will also be assessed to determine whether a bank’s lending is excessively concentrated among its top borrowers and whether it is complying with the single-borrower exposure limit.

Financial inclusion indicators will cover lending to cottage, micro, small and medium enterprises (CMSMEs), agriculture and green projects, as well as efforts to bring new customers into formal banking services.

Arfan Ali, former managing director of Bank Asia, told TBS that accountability should be a requirement for every job and described the new framework as “a good step”.

“However, evaluating performance every six months is too early. It would be better if it were done annually,” he said, adding that many bank MDs had been able to remain in their positions for long periods by maintaining the satisfaction of their chairmen.

“Bangladesh Bank considers their experience when appointing them. But if they remain under continuous supervision under a defined framework, it will bring greater discipline to the banking sector,” he said.