Advance to Deposit Ratio (ADR) is considered as a barometer of progress of all financial institutions. ADR is the ratio of total advances to total deposits, where advances comprise all banking advances, except foreign currency, held against export development fund (EDF), refinance and offshore banking unit exposure. Deposit comprises all demand and time deposit excluding bank deposit and additional borrowing.
A high ADR shows that banks are generation more
credit from their deposits and vice-versa. The outcome of this ratio reflects
the ability of the bank to make optimal use of the available funds. The ADR of
commercial banks has great significance.
Primarily, it is a measure of the utilization of funds by the banking system. This ration is an important tool of monetary management. Magnitude of the said ration indicates management’s aggressiveness to improve income through higher lending.
The formula for calculating AD ratio is as follows:
ADR = Total loans and advances or investments / (Total
time and demand liabilities +Interbank deposit surplus*+Bond surplus**)
Interbank deposit surplus = Deposit from other banks
- Deposit with other banks (if -ve then 0)
**Bond surplus = Total amount raised from issuing bond – Total investment in bond of other banks (if -ve then 0)
ADR for Islamic banking operation of conventional banks: Conventional banks having Islamic banking business have to calculate and maintain ADR separately for conventional banking and Islamic banking operation. ADR for Islamic banking operation is same as that if Islamic Shariah based banks.
It is important to adjust the AD ratio limit with
changing conditions of bank’s asset and liabilities. The Management of the bank
should inform the board regarding AD ration in every meeting so that the board
may take quick decision necessary to adjust the ratio.