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What is Loan to Deposit Ratio

Loan to deposit ratio is the ratio of the total amount of credit disbursement to the total funds received. This financial ratio is used as an indicator to determine the level of ability of banking companies to channel core capital and Third Party Funds (DPK) sourced from the public (in the form of savings, current accounts, certificates of time deposits, and time deposits) in the form of credit.

The loan to deposit ratio (LDR) is used as an indicator of bank liquidity assessment, namely the competence to repay the bank's obligations to customers. The higher the ratio number shown, the lower the liquidity capability. Then, how to calculate LDR? Is there a benchmark for a healthy loan to deposit ratio?

Contents hide
1. LDR Calculation Function
2. LDR becomes Loan to Funding Ratio (LFR)
3. The formula for calculating LDR
4. Factors Affecting LDR
5. Conclusion
5.1. Develop Funds and Contribute to the National Economy by Funding for SMEs with Accelerator!
LDR Calculation Function
Banking requires LDR as an assessment tool that shows how healthy the business activities being run by a banking company are. Here are some other functions of LDR:

As an indicator of bank health.
As one of the standard indicators for the evaluation of Anchor Bank or Anchor Bank (minimum LDR 50%).
As a major determinant of the minimum Statutory Reserves (GWM) of banks.
As one of the requirements for tax relief given to banks for mergers.
Meanwhile, for investors and customers who plan to deposit funds in a bank, the loan to deposit ratio is an indication of how well the bank is operating.

LDR becomes Loan to Funding Ratio (LFR)
The policy that regulates the loan to deposit ratio is PBI No. 15/15/PBI/2013 dated December 24, 2013. Bank Indonesia then made changes through PBI No. 17/11/PBI/2015, stated that securities would be included in the LDR calculation formula. This policy adjustment was motivated by the expansion of the funding component in order to reach a wider MSME sector.

So, what is currently applicable is the loan to funding ratio (LFR). Similar to LDR, there are only additional securities issued by banks (SSB) and owned or held by non-banks (both residents and non-residents) as a source of income.

The types of SSB in question include Floating Rate Notes (FRN), Medium Term Notes (MTN), and bonds (subordinated bonds are not included). The issuance must be through a public offering, and has an investment grade rating through a valid rating agency and is approved by the Financial Services Authority.

Formula for Calculating LDR
Referring to PBI policy No. 17/11/PBI/2015, LDR is a comparison of the total loans disbursed with the total receipts of funds. So, the loan to deposit ratio formula is:

LDR = (Loans Granted / Total Funds Received) x 100%
The credit used in the calculation formula is the volume of credit granted to third parties (loans to other banks are not included) divided by funds from bank capital, third party funds include savings, current accounts and time deposits (not included between banks), and securities issued published.

Meanwhile, the soundness of a bank based on the LDR ratio is determined as follows:

The minimum LDR limit allowed by BI is 78%.
The maximum LDR limit allowed by BI is 92%
A healthy loan to deposit ratio generally ranges from 78%-92%. However, with certain requirements, the maximum LDR limit is relaxed to 94%, i.e. if it fulfills the NPL (Non Performing Loan) requirements for gross credit and the MSME NPL is below 5%. Meanwhile, according to central bank regulations, the tolerance limit for the loan to deposit ratio is 85% to 110%.

Also read: CAGR or Compound Annual Growth Rate formula

Factors Affecting LDR
The cause of the rise and fall of LDR can come from internal or external conditions of banking companies. But in general, the following factors have the potential to change LDR:

People's economic conditions affect the demand for credit and the amount of savings. If these Third Party Funds slow down, the LDR will tighten.
If the trend of lending slows down, the banking LDR will also become looser. This is also influenced by the rapid growth of TPF.
Rising and falling interest rates are monetary policy regulated by the central bank. This also affects the LDR, ie when interest rates are low, the demand for credit may increase.
Conclusion
The loan to deposit ratio is a measure of the ability of banking companies to refinance funds withdrawn by customers or depositors, by relying on credit as a source of liquidity. A healthy LDR can fulfill two functions, including the need for credit disbursement to encourage economic growth, as well as controlling the health of banks.

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