Reducing advance-deposit ratio (ADR)

The Bangladesh Bank (BB) unveiled the monetary policy for the second half (January-June) of the current fiscal year. The governor of the central bank, while formally announcing the policy, indicated that advance-deposit ratio (ADR) would be reduced shortly although he did not specify date and time. The announcement was actually made by the BB a few days ago in a meeting with heads of private banks where banks were informed that ADR would be revised to tackle inflation in the country.

Currently banks and financial institutions are allowed to extend loans up to 85 per cent of their deposits while the allowable limit for a Shariah-based Islamic bank is 5.0 per cent higher. It is learnt through informed sources that the BB has decided to reduce the limits to 83 per cent for conventional banks and 89 per cent for Shariah-based Islamic banks and the decision was already communicated to banks. As expected the decision was not greeted with cheer and the Association of Bankers Bangladesh (ABB) informed the central bank in writing that if the decision is implemented small entrepreneurs would be in fund crisis and the banking sector of the country would need additional deposits of Tk 200 billion to Tk 250 billion.

Banks had surplus liquidity even a year ago. But as advances increased by leaps and bounds and process of loan repayment got slower in comparison, banks' liquidity came under pressure. On the other hand, deposits declined because rate of interest was lowered. According to last published report of the BB, by the end of November last year annual growth of advances in the private sector was 19.06 per cent. Report for December is yet to be published and it was learnt through various sources that growth of advances would be more than 18 per cent.

The target for growth of credit in the private sector was fixed at 16.2 per cent last year, but actual amount of loans disbursed exceeded the target by several times and there is no conclusive evidence that loans in excess of the target have strengthened investment in the private sector. On the contrary, when business leaders are approached for comments, most of them are of the view that investment lost its momentum.

The Bangladesh Bank statistics show import financing increased by a large margin and a major share of imports were financed through bank borrowing. It needs to be ascertained how much of the imports included raw materials, capital equipment and intermediate products. It also needs to be verified whether luxury products are being imported taking advantage of lower rate of interest and whether in the name of capital machinery something else is being imported to evade higher taxes or whether money is being laundered through false declaration. The Centre for Policy Dialogue (CPD) has termed unusual increase in import of cotton as doubtful, because in the first five months of the current financial year import of raw cotton increased by more than 70 per cent over the corresponding period of last year while RMG exports increased only by 7.0 per cent.

Therefore, as it is necessary to reduce growth of credit, it is also important that proper utilisation of bank loans is ensured. Decision to restrict loans may lead the banks to impose unnecessary control on distribution of loans which may impede investment further.

It is an open secret that bank loans are being misused by a group of influential borrowers. But the monetary policy did not however include steps to fight the menace of non-performing loans. Reducing the ADR could be one of the limited ways to keep the total amount of disbursable loans and non-performing loan volume down. The only way to curb non-performing loans is not just reduction in ADR but to make sure that information furnished in loan applications are true and supporting security documents are not doctored.

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