Banks play a pivotal role in mobilisation and allocation of resources in an economy. Deposits and advances are termed as inflow and outflow, i.e. the funds of the banks. The loans and advances are deployed by the commercial banks based on the deposits after maintaining statutory requirements prescribed by Bangladesh Bank (BB) from time to time. Deposits mobilised by the banks are utilised for: (i) loans and advances, (ii) investments in government and other approved securities in fulfilment of the liquidity stipulations, and (iii) investment in commercial papers, shares, debentures, etc. up to a stipulated ceiling.
Hence, the Advance Deposit Ratio (ADR) is considered as a barometer of progress of all financial institutions. ADR is the ratio of total advances to total deposits, where advances comprise all banking advances, except foreign currency (FC), held against export development fund (EDF), refinance and offshore banking unit (OBU) exposure. Deposit comprises all demand and time deposit excluding bank deposit and additional net borrowing.
A high ADR shows that banks are generating more credit from its deposits and vice-versa. The outcome of this ratio reflects the ability of the bank to make optimal use of the available fund. ADR of commercial banks has great significance. Primarily, it is a measure of the utilisation of fund by the banking system. This ratio is an important tool of monetary management. Magnitude of the said ratio indicates management's aggressiveness to improve income through higher lending.
In a way, performance of banking industry may be measured through the ADR, since it reflects how the funds are utilised by the banks to generate their revenue and increase the market share. But it has to be kept in mind that, comparing ADR of a bank would be more effective only when this is compared with banks of the same size and similar makeup. Also, it is important for stakeholders to compare multiple financial metrics while comparing banks' different ratios of performance and positions specially the ADR.
Both state-owned commercial banks (SCBs) and private commercial banks (PCBs) were strict to maintain the ADR at 83.50 per cent [though the rate fixed by the Bangladesh Bank was 85 per cent]. With a view to curbing excessive lending ADR has now been slashed down by Bangladesh Bank (BB) by 1.5 per cent to 83.5 per cent. Investment deposit ratio (IDR) for shariah-compliant Islamic banks has been set at 89 per cent instead of the current 90 per cent-which is to be achieved by September 30, 2019. The move is aimed at further improving the capital base of country's banking sector, liquidity situation, inter-bank dependency, and also to maintain the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), according to the Basel III framework and ensuring growth in line with the overall deposit growth.
On May 12, 2019, an article titled 'Financial Performance of State Owned Commercial Banks in 2018: A Brief Review' was published in The Financial Express. The article highlighted ADR maintenance incapability of PCBs and its repercussions. However, I have to disagree with the part of the article where it was stated "….a private bank in its publication of Financial Statement for 2018 in the newspaper prominently highlighted the size of their deposit as Tk.231.97 billion (23,197 crore) and loans and advances as Tk.224.23 billion (22,423 crore) which implies an AD ratio of 96.66 per cent! - a clear violation of Bangladesh Bank regulation."
It has been observed that the calculation of ADR has been done only by putting loans and advances in numerator and deposits in denominator. This might convey a very misleading picture to the stakeholders and the users of the information. Moreover, it is pertinent to state that, Bangladesh Bank provides a formula for calculating ADR in its Asset-Liability Management (ALM) Guidelines.
Furthermore, banks must follow the instruction of BB regarding deduction of some approved items to calculate total loans and advances or investment while calculating ADR. Total demand and time liabilities are also calculated according to DOS Circular no. 01/2014 as per instruction of the said guidelines.
The article, authored by a leading economist of the country, featured some valuable information regarding the achievements and opportunities of SCBs. But the write-up appears to be judgmental regarding the role of PCBs in deposit mobilisation and extending credit facilities.
It is known to all that, SCBs, PCBs and other non-banking financial institutions (NBFIs) witnessed a volatile period in the year 2018. And PCBs are one of the key players handling the situation professionally and diligently. Aggression, agility and customer-centric attitude have been the key success mantras for PCBs from the very beginning. All activities of PCBs are driven to give outstanding customer experience in banking while complying with all rules and regulations of the regulators.
In order to comply with recent ADR requirements, PCBs are focused on catering different schemes to customers to attract deposit from all around the country not only through conventional banking, but also by initiating agent banking, mobile financial services etc.
In this connection, it cannot be said that, the rise of cost of deposit occurred due to the activities of PCBs. Rather, it can be said that, it is mostly because of the external environment of the sector that has witnessed frequent changes in the year 2018. Even though, some PCBs are unlikely to comply with the recent ADR instruction of BB, it will be absolutely inappropriate to blame all PCBs for this. On the other hand, PCBs are a part the banking sector of Bangladesh, which acts quickly to be in line with the instruction of government for implementing the lending rate at 9.0 per cent.
Nevertheless, ADR is not an efficient process for measuring the quality of loans that a bank has disbursed earlier. This means that ADR does not reflect the number of loans that are in default or might be delinquent in their payments.
Proper ADR is a delicate balance for banks. If banks lend too much of their deposits, they might overextend themselves, particularly during an economic slump. However, if banks lend less of their deposits, they might have opportunity cost since their deposits would be sitting on their balance sheets and earning no revenue.
In a nutshell, to pursue the required ADR requirement all SCBs and PCBs should act proactively and assess their internal and external environment thoroughly, in order to remain competent in the banking sector under given circumstances and challenges.
Tapash Chandra Paul PhD is Head of Risk Management Division, Mercantile Bank Ltd.
tapchpaul@gmail.com