Easing ADR condition may hurt depositors’ interest

Banks having huge exposure to commodity operations and lending to IPPs could end up reaching an advance to deposit ratio of 90 per cent

Sunday, November 02, 2008

By Mansoor Ahmad

LAHORE: The central bank’s move to ease the advance to deposit ratio of 70 per cent for commercial banks may hurt depositors’ interest, senior bankers warned on Saturday.For calculating the 70 per cent ADR the central bank has excluded the advances for export refinance, Long Term Financing Facility (LTFF), commodity operations, IPPs and lending amongst banks.This measure would inject substantial liquidity in the banking system and help ease the liquidity crunch faced by the banking industry. However these steps would put pressure on the central bank to be extra vigilant as relaxing conditions means that the ratio of advances would in fact increase beyond 70 per cent of the actual banking deposits.The banks have high exposures in advances compared to deposits. The central bank instead of increasing the advance to deposit ratio did just the opposite. Instead of convincing banks to increase deposits by offering lucrative returns in order to enhance liquidity the central bank increased their capacity to lend, banking experts said.Former vice president Allied Bank Limited Mohammad Ashraf said liquidity for a bank means the ability to meet its financial obligations as they come due. He said it is for this reason that the central bank requires the commercial banks not to go beyond reasonable limits while giving advances.He said bank lendings are relatively liquid assets, but it funds its loans with mostly short-term liabilities. He said advance to deposit ratio should be fixed on realistic basis.He said some banks have huge exposures in commodity operations and lending to IPPs compared with their total deposits. He said such banks could end up reaching an advance to deposit ratio of even 90 per cent. Thus one of the main challenges to such banks of ensuring enough liquidity under all reasonable conditions to honour their commitment to their depositors would be badly hurt, he concluded.Spokesman SBP Syed Wasimuddin in reply to an email said that the revised circular (BSD Circular No. 28) on the subject was issued to support the extraordinary circumstances prevailing presently.In last few weeks the banks did face some slow down in deposits, while growth in advances persisted. ADR continues to be under monitoring at SBP but given the current unusual trends, SBP on request of Pakistan Banks Association (PBA) decided to streamline the instructions for some period, he said.In this perspective, the amount of refinance availed by the banks from SBP under Export Refinance and Long Term Financing Facility Schemes basically provides the banks with matching funding for on-lending under these schemes to export oriented projects. Thus, a bank does not have to raise any additional deposits and incur any liquidity risk in respect of the export finance and long-term lending that have been refinanced from SBP.The spokesman did not mention the rationale for excluding commodity operation and IPP funding from advances.Similarly he added, paid up capital received from shareholders constitutes a significant part of the Tier 1 capital, and this capital represents the most stable source of long-term funding.A well-capitalized bank could have a significant cushion available in the form of capital for financing its lending portfolio. Presently the aggregate Tier I capital stands at 7.4 percent of total assets of banks. Therefore, the Tier 1 capital has been combined in the definition of deposits for ADR calculation. The question is that if this is true then why was it excluded from deposits earlier.