The demand for loans has dropped due to the economic downturn caused by Covid-19 pandemic, but 11 conventional and Islamic banks in Bangladesh still could not maintain their Advance Deposit Ratio (ADR) this March.
The advances to deposits ratio measures loans (advances) as a percentage of deposits. A ratio of 100% or less indicates that the bank is funding all its loans from deposits rather than relying on funding from the capital market or other banks.
During this period, these 11 banks disbursed loans exceeding the ratio set by the regulator, says the central bank statistics recorded till 25 March. The Bangladesh Bank sets ADR for banks when necessary to help protect the depositors, as crossing this ratio puts their deposits at risk.
The regulator decreases ADR when it wants to clamp down on loan disbursements, and increases the ratio when it wants to boost those. The Bangladesh Bank had increased ADR last year to help the economy recover from the impacts of Covid-19 pandemic.
Under the move, the regulator increased ADR by 2% for all banks, setting the ratio at 87% for conventional and 92% for Islamic banks. Which means conventional banks will be able to disburse Tk87 as loans against Tk100 deposit, while Islamic banks will be able to disburse 92%.
Despite the 2% increase, BASIC Bank, Padma Bank, National Bank, AB Bank, Midland Bank, One Bank, RAKUB, Union Bank, Social Islami Bank, First Security Islami Bank and EXIM Bank exceeded the limit in March.
Among these, BASIC Bank, Padma Bank and National Bank have been unable to maintain the ADR because of their involvement in loan scandals. The central bank recently stated that the National Bank will no longer be allowed to disburse loans unless they bring their ADR down.
Among the seven private banks that failed to maintain the ratio, there are two fourth generation banks as well.
Commenting on the matter, central bank spokesperson and executive director Serajul Islam said, "We will take a closer look at why these banks are failing to maintain their ADR.
"The banking sector however has excess liquidity, and we have to ease the ADR regulations in some cases considering the need to implement the incentive package."
Meanwhile, overall ADR in the banking sector stood at 72.82% in March as the demand for loans was low because of the pandemic's impacts. The ratio was 68.13% in conventional banks and 84.53% Islamic banks.
On the issue, Meghna Bank's Managing Director and CEO Sohail RK Hussain said, "The overall ADR in the banking sector has not increased, which indicates that the banks have excess liquidity.
"It would be better if the ratio had stood at 83%-84%. At this time, we are receiving almost no new business projects from the private sector. Industries where production is currently going on are also not expanding."
He continued, "This is why the demand for loans and disbursements is low, which in turn has caused the overall ADR to become low too. If the government does not increase its borrowing from the banking sector, the ADR will not witness much change throughout this year."
Hussain added that the loan interest at the customer level has dropped too. "The customers should utilise this opportunity. On the other hand, the banks should invest in bonds using their excess liquidity instead of keeping the money idle."