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BB defers readjustment of ADR by six months

Banks get until year-end to check higher advances to address liquidity crunch

FE Report | February 21, 2018 00:00:00

The central bank extended time for six months to December for banks to execute its revised advance- deposit ratio (ADR), apparently as the measure yielded chain effects like credit squeeze, capital-market jitters and liquidity crunch.

To this effect, Bangladesh Bank issued a circular Tuesday, as a sort of unease continued to prevail on the money market.

Following the extension, funded loan created on the basis of commitment made on or before January 30, 2018 by commercial banks, resulting in increase in ADR, will not be treated as a violation of the instructions.

But, in this case, the ADR must also be adjusted by December 31, 2018, the BB circular says.

Bangladesh Bank (BB) lowered limit of ADR on January 30 with a view to checking possible liquidity pressure on the money market following some banks' 'aggressive' lending to some key sectors.

The BB re-fixed it at 83.50 per cent for all the conventional banks and at 89 per cent for the Shariah-based Islamic banks.

Earlier, before the January 30 circular, ratios were 85 and 90 for conventional and shariah-based banks respectively.

However, a central-bank spokesperson views that this latest extension is meant for facilitating country's business activities.

"We've extended the latest timeframe just to accelerate the country's economic activities," a central bank official told the FE.

On the other hand, top executives of private commercial banks heaved a sigh of relief. They told the FE that they think this is a piece of welcome development for the banking industry as many were in a hurry to raise deposit -- thereby spurring interest rates.

Anis A. Khan, managing director and CEO at Mutual Trust Bank, told the FE: "We welcome this latest circular relating to the extension of the ADR."

He said the interest rates on deposits witnessed a rising trend following June 30 deadline given by the central bank for advance-deposit readjustment. "We now will get much time to comply with the latest ADR and it will definitely be conducive for us."

On the other hand, some experts who deal with the financial market told the FE that this latest extension of the ADR timeline will actually yield little extra benefits for the money market as only some banks had crossed the ADR limit following their aggressive lending.

They, however, said there was a "psychological effect" of the extension on the capital market as many believe the tightening of ADR would help squeeze money supply.

Dr Mirza Azizul Islam, an economist and former adviser of caretaker government, told the FE: "Actually there is still excess liquidity in the banking sector although the amount has shrunk recently to some extent."

He said some private commercial banks and some specialised banks have higher ADR as they had lower deposit growth vis-a-vis lending. Dr Islam, however, said there was an impact of it on the capital market as, shortly after the issuance of the circular at the fag-end of January, the share market fell.

Actually, the relationship between the capital market and the ADR is very much insignificant.

In the meantime, the growth in deposit, on a year-on-year basis, rose to around 11 per cent in November 2017 from 10.72 per cent as on October 12, 2017, according to the BB officials. All-bank deposit growth was 13.13 per cent on December 31, 2016.

On the other hand, credit growth, particularly in private sector, increased significantly in the recent months due to higher trade financing by the banks for settling import-payment obligations.

Much of the money went for financing import of fuel oils, and consumer items including food-grains and capital machinery.

The all-bank credit growth rose to 19 per cent in November from 18.05 per cent as on October 12, 2017. It was 15.32 per cent on December 31, 2016.

The ADR of all banks rose to more than 75 per cent in November 2017 from 74.85 per cent as on October 12. It was 71.85 per cent as on December 31, 2017.

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