Loan to Deposit Ratio (LDR) is often used as an indication in assessing a company’s financial health in carrying out various business activities. Check out a more complete explanation regarding the Loan to Deposit Ratio starting from the Definition, Formula, Factors, to Calculation Functions:
Understanding Loan to Deposit Ratio
Loan to deposit ratio is a loan to deposit ratio (LDR) which is often used in assessing bank liquidity by comparing total deposits and total bank loans in the same period. If the loan to deposit ratio (LDR) calculation then shows a higher ratio number, then it will then lend out all the funds it has, so the bank is relatively illiquid. On the other hand, if the loan to deposit ratio (LDR) results are high, then the bank will then become liquid with excess capacity of funds ready to be lent.
In calculating the loan to deposit ratio, the total amount of bank loans and the total amount of deposits will then be divided into equal periods. This ratio can then ultimately be used as an indication of the level of capability of a conventional bank in channeling funds from the public.
This distribution can also be done through various other banking products ranging from savings, time deposits, current accounts, time deposit certificates, and many more. Loan to deposit ratio (LDR) is also often used as an indication in assessing a company’s financial health in carrying out its various business activities.
With this step in calculating the loan to deposit ratio (LDR), a bank’s ability to retain and acquire customers will be known. If a bank’s fund receipts continue to increase, new sources of funds and new customers will then be successfully obtained.
For investors, the loan to deposit ratio (LDR) itself is very important as an indication used to determine whether this bank will then be operated well. If a bank’s fund receipts do not increase, then show a decline, then the bank will only have a small amount of funds to credit.
Apart from that, the loan to deposit ratio (LDR) also helps show how well the bank is retaining and attracting customers. If within a certain period of time deposits in the bank soar and increase, new clients and money will then join. So banks will have more money to lend, which also increases income.
Even though it is the opposite in nature to a loan, intuition as an asset for the bank will then enable it to earn interest income from the loan. On the other hand, deposits are a bank obligation because they have to pay interest on these deposits, even though only at low interest rates. Meanwhile, the loan to deposit ratio (LDR) also has a complicated balance for a bank.
If banks make loans with too many deposits it can result in a decline in economic terms. However, if banks lend too little, they may incur opportunity costs because deposits on their balance sheets will not generate income. Banks that have the lowest LTD ratios may have lower interest income and thus generate lower income.
Various factors can drive changes in the loan to deposit ratio. Economic conditions also influence loan demand and the amount of investor savings. If consumers do not have jobs, then they are unlikely to increase their savings. Central banks also regulate monetary policy by raising and lowering interest rates. If interest rates are too low, then demand for loans may increase depending on economic conditions at the time.
In short, there are many external factors that will influence the loan to deposit ratio (LDR) at a bank. Please note that the ideal loan to deposit ratio is 80%-90%. A loan to deposit ratio of 100% then means the bank lends one dollar to customers for every dollar earned in deposits it accepts. This also means the bank then does not have significant reserves available for expected and unexpected contingencies. Central bank regulations are also a factor in how banks are managed and impact their loan to deposit ratios.
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LDR Calculation Formula
The loan to deposit ratio (LDR) calculation formula itself refers to PBI policy no. 17/11/PBI/2015. Loan to deposit ratio (LDR) is a comparison between total credit disbursed and total receipts. The following is the loan to deposit ratio formula:
LDR = (Credit Provided / Total Funds Received) x 100%
The credit used in the calculation formula itself includes the volume of credit provided to third parties (where credit to other banks is not included) then divided again by funds from bank capital, third party funds themselves include savings, current accounts and deposits (excluding inter-bank ), and securities issued. Meanwhile, the bank’s health level based on the loan to deposit ratio (LDR) is as follows:
- The minimum loan to deposit ratio (LDR) limit permitted by BI is 78%.
- The maximum loan to deposit ratio (LDR) limit permitted by BI is 92%
A healthy loan to deposit ratio generally ranges between 78% -92%. However, with certain requirements, the maximum loan to deposit ratio (LDR) limit is then relaxed to 94%, namely if the gross credit NPL (Non Performing Loan) and MSME NPL requirements are met below 5%. Meanwhile, according to central bank regulations, the loan to deposit ratio tolerance limit is 85% -110%.
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Factors that Influence LDR
The causes of the rise and fall of the loan to deposit ratio (LDR) can then come from internal or external conditions of a banking company. Although in general, several factors have the potential to change the loan to deposit ratio (LDR), including:
- Community economic conditions also influence demand for credit and the amount of savings. If Third Party Funds slow down, there will be a tightening of the Loan to deposit ratio (LDR). The credit distribution trend will also slow down, banking loan to deposit ratios (LDR) will also loosen. This is also influenced by the rapid growth of TPF. If there are ups and downs in interest rates as monetary policy is regulated by the central bank. This will then affect the loan to deposit ratio (LDR), namely if interest rates are low, demand for credit may also increase.
- Capital Adequacy Ratio (CAR) as a ratio that shows the extent to which all bank assets contain risks (credit, securities, investments, claims on other banks) are financed from the bank’s own capital funds in addition to obtaining funds from sources outside the bank, such as loans (debt), public funds, etc. (Dendawijaya 2009:121).
- The Capital Adequacy Ratio (CAR) is also used to measure the adequacy of capital owned by a bank to support assets or generate risks, for example in the credit provided. The higher the Capital Adequacy Ratio (CAR), the stronger the bank’s ability to bear various risks on productive assets and any risky credit. Furthermore, the factor that influences the Loan to Deposit Ratio (LDR) is the quality of productive assets as investment of funds in the form of securities, credit or other investments that have the potential to provide profits for the bank.
- Productive asset quality includes research on asset quality which is based on reserves for impairment losses on productive assets (based on PBI Number 14/15/PBI/2012). The large amount of reserves formed then shows that the quality of the bank’s productive assets has decreased, resulting in a decrease in revenue which is ultimately received by the bank. Revenue itself also experienced a decline, causing a decrease in capital which had an impact on reducing the bank’s ability to finance risky assets (credit).
- Operational costs to operational income (BOPO) with a comparison between operational costs and operational income in measuring the level of efficiency and ability of the bank in carrying out its operational activities (Rivai, et al. 2007:722). Based on this explanation, operational costs also have a negative effect on the loan to deposit ratio (LDR) because the smaller the BOPO, the more efficient the costs borne by the bank in generating high income from credit (loans).
- The net foreign exchange position also limits the bank’s risk in foreign exchange transactions thereby affecting fluctuating exchange rate changes. The bank’s net foreign exchange position is also used to limit speculative transactions and maintain the source and use of foreign currency funds within the bank. Based on Bank Indonesia regulation number 17/5/PBI/2015 dated 29 May 2015, the maximum net foreign exchange position promised by Bank Indonesia is 20% of bank capital. So it can be concluded that if the PDN ratio increases, the Loan to Deposit Ratio (LDR) decreases.
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Loan to Deposit Ratio Calculation Function
Loan to Deposit Ratio (LDR) will help investors observe the condition of a bank, whether it is feasible to operate, and what its financial condition is, whether its receipts are increasing or decreasing. In some cases, the bank will then lend the funds at increased interest. However, if the funds are used to fund credit management, the bank will then have to bear the costs of paying interest on the debt. Apart from that, the Loan to Deposit Ratio (LDR) also shows the quality of the bank in serving and paying attention to customers.
If deposits increase, customers will also increase. On the other hand, banks will then lend a lot of funds to customers, thereby reducing income levels. Banks that lend funds to their customers will also produce low profit margins.
However, a balanced Loan to Deposit Ratio (LDR) is the best way for banks. With the increasing number of deposits being lent, it is possible that the economic level will decline. However, if too few deposits are lent, assets tend not to increase and remain stable.
In the company scope, Loan to Deposit Ratio (LDR) is also known as debt to assets ratio. The function itself is similar to the loan to deposit ratio, only the debt to assets ratio is used to measure total assets that can be used to cover the company’s debts. With the aim of knowing the effectiveness of managing company assets and generating income, the activity ratio is used. Meanwhile, the current ratio is used to indicate the company’s ability to pay short-term debt. Both are then included in the debt to assets ratio indication.
Banking itself requires the Loan to Deposit Ratio (LDR) as an assessment tool that shows how healthy the business activities being carried out by a banking company are. Another function of the Loan to Deposit Ratio (LDR) itself is as an indicator of bank health, as well as an indicator for standard evaluation of Anchor Bank or Anchor Bank (minimum LDR 50%).
As a determinant of the size of the bank’s Minimum Statutory Reserve (GWM). As one of the conditions for tax relief given to banks to carry out mergers. Meanwhile, customers and investors who plan to entrust funds to a bank, the Loan to Deposit Ratio (LDR) figure itself is an indication of how well the bank is then operated.