BB raises ADR to boost investment

Staff Correspondent

20 September, 2019 12:00 AM printer

The central Bangladesh Bank (BB) on Tuesday raised the advance-deposit ratio (ADR) for banks by 1 to 1.5 percentage points to increase credit supply and spur investment in the country.

BB issued a circular raising the ADR for conventional banks to 85 per cent from 83.5 per cent and IDR (investment-deposit ratio) for Islamic banks to 90 per cent from the previous 89 per cent.

Banks have praised the move as private sector credit growth has been maintaining a declining trend for months, hitting a six-year low of 11.26 per cent in July, according to BB data.

Earlier on January 30 last year, to rein in aggressive lending, the BB instructed conventional banks and Shariah-based banks to lower their loan-deposit ratios to 83.5 per cent and 89 per cent respectively by June that year. Private sector credit growth in January last year was 18.36 per cent.

But the deadline was extended thrice, with the most recent cutoff date being September 30.

Volatility grasped the entire money market after the central bank had issued the instruction. The interest rate on both lending and deposit went up after the instruction.

But seeing the banking sector’s latest liquidity position, capital base and inter-bank lending trend, the central bank has gone back from its earlier stance.

As per the latest central bank data, private banks’ loan-deposit ratio stood at 84.42 per cent. The ratio of 10 banks was well above the ceiling of 85 per cent.

The improved liquidity situation in the banking system through the government’s borrowing through the sales of national savings certificates dropped significantly in the current fiscal FY 20. This also prompted the central bank to ease the policy, a senior BB official said.

 Due to the government’s tax measures, the net sales of NSCs fell by 57.10 per cent to Tk 6,091.33 crore in July against Tk 5,034.74 crore in the same month last year.

Besides, the government’s borrowing from the BB against treasury bills and bonds also helped the central bank inject local currency in the market. The BB sold $2.31 billion and $2.34 billion in the fiscal year 2017-2018 and 2018-2019 respectively in the market.

The improvement in the trade balance situation also supported the bank sector situation betterment.

In line with the trend seen in last fiscal year, country’s trade deficit dropped by 15.6 per cent to $979 million in July, the first month of the fiscal year 2019-20, against $1.16 billion in the same month of FY 2018-19.

In FY19, the trade deficit fell by 14.76 per cent to $15.49 billion from the record $18.18 billion deficit in FY18.