The Bangladesh Bank has introduced a uniform Key Performance Indicators (KPIs) framework for managing directors (MDs) and chief executive officers (CEOs) of scheduled banks, making top executives subject to measurable targets covering capital strength, asset quality, profitability, governance, customer service, and financial inclusion.
It issued the framework on Sunday, aiming to safeguard banks and depositors, strengthen discipline and good governance, and contribute to financial stability.
The framework took effect immediately.
For newly appointed or reappointed MDs/CEOs, targets will be set at the beginning of their tenures.
But for the existing MDs/CEOs, targets must be set within a month.
The framework will cover three years or the remaining tenure, with a rolling six-month assessment approach.
For the existing MDs/CEOs, the first assessment period will run from October 1, 2026 to March 31, 2027.
Banks must submit the board-approved full-tenure KPI framework to the Bangladesh Bank's Banking Regulation and Policy Department-2 within seven working days.
The central bank will review the targets and may require changes.
The framework builds on a February 2024 directive that required banks to include performance targets in MD/CEO employment contracts, including targets for reducing classified loans, recovering written-off loans, and improving financial and managerial performance.
Association of Bankers, Bangladesh (ABB) Chairman Mashrur Arefin, who is also the MD and CEO of City Bank, welcomed the initiative.
"I am travelling now and have only had a cursory look at it. My initial impression is largely positive," he said.
"All the key areas appear to have been covered. However, if the boards of banks do not adequately empower their CEOs to handle and deliver on these areas or if the banks are already in weak financial condition, the framework could be quite harsh on the CEOs," he said.
Naturally, the CEOs of fundamentally stronger banks with the right corporate governance practices and organisational culture in place would fare better, he also said.
"I would have been happier if the central bank had consulted us or ABB while developing these ideas. That might have allowed some of the challenges unique to our banking industry to be better reflected in the circular."
Under the new framework, KPI assessment will cover five broad areas: bank solvency and liquidity, asset quality, profitability, governance and internal control, and inclusion, customer and market conduct.
Solvency and liquidity carry 25 per cent of the total score, while asset quality also carries 25 per cent.
Profitability has a 10 per cent weight, governance and internal control 25 per cent, and inclusion, customer and market conduct 15 per cent.
The indicators include capital adequacy, liquidity, advance deposit ratio (ADR), non-performing loans (NPLs), stressed assets, provision coverage, large-loan concentration, recovery of classified and written-off loans, return on assets, return on equity, and net interest margin.
The governance assessment will cover regulatory compliance, anti-money laundering and combating the financing of terrorism, composite risk ratings, regulatory reporting, ICT and technology risks and leadership.
Customer and market conduct indicators include digital financial services, service quality, CMSME and agricultural lending, green finance, financial inclusion, rural loan distribution, fraud and forgery risk mitigation, and legal risk management.
For individual KPIs, an achievement below 50 per cent of the target will receive no score, while that of 50 per cent or more will receive a proportionate score.
The framework also imposes additional penalties for poor performance in six critical indicators.
If an MD/CEO achieves less than 50 per cent of the target or receives zero in any of these indicators, 25 per cent of the maximum weighted score of that KPI will be deducted from the overall score.
The six indicators are ADR, gross NPL ratio, net NPL ratio, large-loan or top-borrower concentration, recovery against classified and written-off loans, and CMSME, agriculture, green finance and financial inclusion outreach.
An overall score of 75 or above will be classified as "above average", while 65 to below 75 will be considered "average".
A score below 65 will be classified as "below average".
The central bank said an above-average result would represent standard performance, while an average result would indicate a need for improvement.
A below-average result would be considered substandard and require immediate improvement.
The board of directors will set KPI targets for the MD/CEO based on the bank's immediate previous quarter performance, regulatory expectations, risk profile, business strategy and international best practices.
Boards will review the MD/CEO's performance generally every six months and submit the assessment report to the Bangladesh Bank within 15 days of the review.
The central bank may issue further directives based on its assessment.
The framework allows banks to add their own business-specific KPIs in addition to the uniform minimum indicators set by the Bangladesh Bank.
