Advance-deposit ratio of banks rises

Banks' loan-to-deposit ratio rose in December as deposit growth continued to slow, giving economists to predict its impact on the liquidity position.

The advance-to-deposit ratio (ADR) increased to 78.92 per cent in December 2022 over 77.55 percent in November 2022, according to Bangladesh Bank (BB) statistics released Thursday.

During the period, the deposit growth was recorded at 5.44 per cent, down by 1.57 percentage points from November. The credit growth stood at 13.82 per cent, down by nearly 1.0 percentage point from November.

The loan-deposit ratio is used to assess a bank's liquidity by way of comparing a bank's total loans to its total deposits for the same period.

If the ratio is too high, it means the bank may not have enough liquidity to cover any unforeseen fund requirement. Conversely, if the ratio is too low, the bank may not be earning as much as it could be.

Bangladesh Bank set advances-to-deposit ratio at 87 per cent for conventional banks and 92 per cent for Islamic banks with effect from April 15, 2020.

Bankers and economists view that the deposit growth continued to decline in December, resulting in a rise in the loan-to-deposit ratio. They argue that the private-sector credit did not rise during the period, so the lower amount of denominator impacted the ratio.

Syed Mahbubur Rahman, managing director and CEO at the privately owned commercial bank MTB, told the FE: "The deposit growth remained low so the overall loan-to-deposit ratio rose."

Mr. Rahman, however, said this was still lower than the central bank-set cap.

As it is still lower than the BB target, so there is a lack of adequate liquidity, he said.

Dr Zahid Hussain, former lead economist at the World Bank, told the FE that the deposit growth remained slow mainly because of higher inflation coupled with lower wage rate.

"How can people save at a time when the economy is experiencing higher inflationary pressures?"

The economist, however, warned that credit growth may slow down in the coming months following persistent higher inflationary pressure on the economy.

In the meantime, the weighted average overnight inter-bank call money rate increased to 6.75 per cent on January 11, up by nearly 1.0 percentage point since January 04, 2022.

The liquidity position of the banking system also weakened in November 2022. The liquidity in excess of the maintained SLR stood at Tk 1531.77 billion at the end of November 2022. The daily excess reserves dropped to Tk 65.91 billion in November over Tk 115.71 billion in October 2022.

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