BB backtracks on cutting lending ceiling for banks

Amid liquidity pressure, Bangladesh Bank backtracked on its earlier decision to curb the lending ceiling, keeping ADR (Advance Deposit Ratio) unchanged at 85 percent for conventional banks and 90 percent for Islamic banks.

In the face of pressure from banks, the central bank issued a circular setting ADR at the previous rate, giving more space to lend.  

Earlier, in January last year, the central bank cut ADR by 1.5 percent, setting the new limit at 83.5 percent for conventional banks and 89 percent for Islamic banks, to curb aggressive lending.

ADR 85 means, a bank can lend Tk85 against its deposit of Tk100.

The central bank had to extend the implementation time of the new ADR ceiling for the fourth time as banks failed to comply with it amid a liquidity crunch.

The last deadline for implementing the ceiling was September 30.

Despite extending the time repeatedly, most banks were far away from the new ceiling, and many banks remained above the existing regulatory limit.

Some 17 banks were above the existing regulatory limit of 85 percent as of April, while only 21 complied with the new ceiling.

The average ADR stood at 78.73 in April, central bank data shows.

ABB (Association of Bankers, Bangladesh) has been pursuing the central bank to come back from the curtailing decision to enhance lending capacity, said a senior executive of Bangladesh Bank.

Amid this situation, the central bank kept the regulatory ceiling unchanged to ease the liquidity position, he said.

The decision to cut ADR is considered one of the factors of liquidity crisis as many banks which were in aggressive lending moved to adjust with authorised limit by hunting deposits.

When most banks were in deposit hunt, money crisis hit the banking system creating huge liquidity crunch, according to industry insiders.

The severe liquidity crisis compelled central bank to slash the cash reserve requirement (CRR) by one percentage point to 5.5 percent in April last year.

The decision of keeping ADR unchanged will give banks more capacity to lend, said Syed Mahbubur Rahman, chairman of ABB.

He said it will comfort the liquidity market.

The deposit in the banking sector stood at Tk10,71,000 crore in July, when total loan was Tk9,74,500 crore, according to Bangladesh Bank.