There is no possibility of any bank in our country to collapse in near future due to high advance deposit ratio (ADR) because there is no proper bankruptcy act and our banking sector enjoys a kind of protection. There is no precedence of merging or closing or bankrupting of any bank in our country although this is a very common practice in the developed world. Regardless of eventual impact of high ADR in the country's financial sector, the bank with higher ADR is always under threat of liquidity risk and this bank's balance sheet is viewed with negative approach. Especially, the banks with higher ADR confront severe adversity in dealing with their counterparts in the international market. Letters of credit (LCs) issued by these banks are not accepted by the banks of other countries. Even many banks are reluctant to establish correspondent relationship with the banks having below standard ADR.
The situation worsens when the ratio violates the benchmark set by the country's central bank. Without correspondent relationship, banks in our country will face tremendous problem in providing trade finance services to the customers engaged in import export business. Many banks in our country are struggling in establishing correspondent relationship and maintaining counterparty limit with overseas banks, particularly with those in the developed countries. This situation will of course adversely impact our business community because not only their business turnover will decline but also the cost increase or revenue fall may occur due to add-confirmation to the LCs or purchasing insurance by their counterpart of the trading country. Bank with higher ADR may become desperate to overcome this situation and as part of their endeavour, they may go for increasing rate on various deposits which will subsequently raise lending rate. This action even may cause negative impact on the bank's profitability. Further, many banks may resort to unethical approach to woo the depositors which may result in financial scandal in the country's banking arena. We are already experiencing the report of bankers direct phone call to the depositors with many unusual verbal assurance for retaining deposit in that particular bank. Apart from this, an undue competition may prevail in the country's banking industry which is not a good sign at all.
STANDARD ADR & PRACTICE IN EUROPE AND ASIA: What is the standard rate for advance deposit ratio is a very crucial question and debatable issue. There is no set rate to follow internationally because this ratio, although a very important aspect, is the result of many economic, non-economic and financial factors which widely vary from country to country and from region to region. This rate also depends on how mature the market is and how strong the regulator is. In the present world, it is expected that banks and financial institutions would play their self-regulatory roles as many rules and procedures protecting depositors' and shareholders' interest are developed and practised by the bank itself. As a part of bank's self-regulatory role, the banks should determine their own advance deposit ratio and follow thereof. However, our banks lack such standard practice and therefore, central bank has to interfere in this area.
In the present-day world, advance deposit rate is very high in Europe and Japan because of their aggressive lending policy as a part of boosting their economy. Even very low and in many cases zero or near-zero interest rate on bank loans has immensely contributed in excessively high advance deposit rate in Europe and Japan. Historically, advance deposit ratio of commercial banks in China was very low as it was only 60 per cent in 2011. It was possible because most of Chinese banks are state-owned banks and strictly regulated. Moreover, they used to follow regressive credit policy during that time and because of this low ADR, commercial banks in China were always well rated in the international arena. However, this rate has recently increased to around 80 per cent because of China's loosening of credit policy and this ADR rise for Chinese commercial banks is viewed with concern by their counterparts in the international market. Banks in India also maintain ADR below 80 per cent; in 2014, it was 78.96 per.
Although there is no hard and fast rule for maximum ADR, there is an unwritten practice of maintaining this ratio at 80 per cent and below as this rate is considered as good liquidity risk. Bangladesh Bank and the banking industry as a whole should gradually try to bring down this ratio below 80 per cent and maintain it.
ADR PRACTICE IN NORTH AMERICA: North American (USA & Canada) financial market is very unique and different from other financial markets in the world. ADR in the banks in USA is found very low, i.e., close to 70 per cent, because financial industry in the country is well mature and well diversified. Moreover Fed (Federal Reserve Bank) of USA maintains very stringent regulatory policy and any violation by commercial banks is severely dealt with. Besides, depth and maturity of the US financial market is very strong and steep competitive environment always prevails in the US financial market. There are multiple sources of funds for the banks and the borrowers. Even depositors have wide source of investment. Business community in the US enjoys mutually exclusive opportunities of borrowing money either directly from bank or by issuing bond in the bond market. When interest rate on bank loan is low, the business community borrows loans from banks and on the other hand, when interest rate is low in the bond market, they mobilise funds by issuing bond and pay off bank loans or vice versa. Besides, banks do not have to depend on depositors' money for their loanable fund as they have the capacity to mobilise fund from bond market by way of either issuing bond or long term loan. This is a common practice in case of residential mortgage, usually involving 20 to 30 years term mortgage. Besides, loan trading-- both primary loan trading and secondary loan trading-- has taken a very mature shape which enables the banks to well manoeuvre their loan deposit portfolio and thus maintain well defined advance deposit ratio. During the financial crisis in the year 2008, many banks, including Citi Bank N.A., survived their liquidity crisis by selling off loans in the secondary loan trading forum. Loan trading is a very simple and straightforward procedure which allows banks to overcome their liquidity crisis and Bangladesh Bank may consider introducing this system in our country. In addition to resolving liquidity crisis, this loan trading facility also helps address NPL (Non-performing loans) problem to a great extent.
Financial market in the USA is very unique and the banks maintain very low ADR for which banks are well rated with very good grading by the credit rating company. North American financial industry has transformed from traditional collateral-based lending to modern credit score-based lending. Therefore, everyone from individual to corporate entity always tries to maintain good credit score which is the result of good liquidity position and timely debt servicing practice.
SUSTAINABLE SOLUTION: Bangladesh Bank's decision to reduce the ADR and extending deadline up to December 31, 2018 for bringing down this ratio below its set maximum threshold level of 83.50 per cent is a good initiative. This is in line with international practice. However, BB's directives do not elaborate the remedial measures to address this situation.
The banks may, however, find it difficult to meet this deadline. They do not have alternative source of mobilising fund and they cannot call back the loans already disbursed. Even if loans are called back, the borrowers will not be able to pay off as there is no such practice. Besides, the bankers cannot improve this ratio by augmenting deposits within a short span of time as banks have no control over depositors. So, Bangladesh Bank should consider the overall situation and discuss with the commercial banks in a bid to find out a suitable solution to this problem.
Time has come to modernise loan operation procedure, bring qualitative change in country's debt servicing practice and also actively consider introducing loan trading system in order to develop a self-sustained financial system.
Nironjon Roy is a banker based in Toronto, Canada. [email protected]
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