What is AD Ratio and how it is being calculated?

Advance 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 (FC), held against export development fund (EDF), refinance, and offshore banking unit (OBU) exposure. Deposit comprises all demand and time deposits excluding bank deposits and additional net borrowing.

A high ADR shows that banks are generating 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. ADR of commercial banks has great significance.

Primarily, it is a measure of the utilization of funds by the banking system. This ratio is an important tool of monetary management. The magnitude of the said ratio 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 Investment/ (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 the 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 operations. ADR for Islamic banking operations is the same as that of Islamic Shariah-based banks.

 It is important to adjust AD ratio limit with the changing condition of banks' assets and liabilities. The Management of the bank should inform the board regarding AD ratio in every meeting so that the board may make quick decisions necessary to adjust the ratio.