Strategic Response Quotient (SRQ): an interpretation

From: Dr John
To: Adis

In reply to your question:

The SRQ can be viewed from several perspectives and therefore has several implications, notably:

1. SRQ measures the interest burden of the bank (Net Interest Margin as a proportion of Net Non-Interest Income).
   That is to what extent the bank is "forced" to extend loans (therefore taking increasing credit risks) to cover its Net Non-Interest Cost or a Negative Non-Interest Income.
   For example, if the bank has a high Net Non-Interest Cost (estimated as Non-Interest Cost minus Non-Interest Income), then the bank must lend to cover this Net Non-Interest Cost.
2. SRQ assesses to loan pricing (ie setting the lending interest rates) to obtain the interest income that is sufficient to cover the Net Non-Interest Cost.
   That means if the Net Non-Interest cost is high, the bank must set its lending rates even higher to earn a profit. This will again increase the credit risk of the bank.

LOAN GROWTH must be evaluated in the light of 2 other financial variables:

1. Deposit growth.
   The loan growth should grow as fast its deposit growth.
   In the long term, if the loan growth is slower than deposit growth, then the bank has to pay cost of deposits. Refer to the subject of Asset Liability Management.
   In the long term, if the loan growth is growing faster than deposit growth, then in the short term the bank will struggle to find deposits to fund the loan growth. refer to Asset Liability Management.
2. Non Performing Loans (NPLs)
   If the loan growth is high, one would expect the NPLs growth to be high. It is highly dangerous to assume the loan growth is high say 40%, but NPLs rate remains the same, say at 2%.

During the 1996/7 financial crisis in Indonesia, the loan growth was very high, but the NPLs stayed at below 3% for most banks. For eg. Bank Danamon has a loan growth of 40% (1994/1995), but in the same period its NPLs was 1.1%.

Read my article: What went wrong in Thailand and Indonesia (Journal of Institute of Bankers Malaysia, Dec 1997).