# Loan to Deposit Ratio: Definition, Formulas, Factors, and Functions

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 of the Loan to Deposit Ratio starting from the definition, formulas, factors, to the calculation function:

## Definition of Loan to Deposit Ratio

The loan to deposit ratio is the loan to deposit ratio (LDR) which is often used in assessing bank liquidity by comparing total bank deposits and total bank loans in the same period. If the calculation of the Loan to deposit ratio (LDR) then shows a higher number ratio, then it will then lend all of its funds, so that the bank is relatively illiquid. Conversely, if the Loan to deposit ratio (LDR) results are high, the bank will then become liquid with excess capacity of funds ready to lend.

In a loan-to-deposit ratio calculation, the total bank loans and total deposits will then be subdivided into the same period. This ratio can then ultimately be used as an indication of the level of ability of a conventional bank in channeling funds originating 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.

By calculating the number of loan to deposit ratio (LDR) ratios, a bank’s ability to retain and acquire customers will be known. If a bank’s receipt of funds continues to increase, then 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 find out whether this bank will then be operated properly. If a bank’s receipt of funds does not increase, then it will show a decrease, then the bank will only have a small amount of funds to credit.

In addition, the Loan to deposit ratio (LDR) also helps show how well a bank is in 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 the bank will have more money to lend, which also increases revenue.

Even though it is opposite in nature to a loan, intuition as an asset for the bank will then make it earn interest income from the loan. On the other hand, deposits are a bank liability because they have to pay interest on these deposits, even if 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 downturn in economic terms. However, if banks lend too little, they may have an opportunity cost because the deposits on the balance sheet will not generate income. Banks that have the lowest LTD ratio may have lower interest income resulting in lower income as well.

Various factors alone can drive changes in the loan to deposit ratio. Economic conditions also affect the demand for loans and the amount of investor deposits. If consumers don’t have a job, they are unlikely to add to their savings. The central bank also regulates monetary policy by raising and lowering interest rates. If interest rates are too low, demand for loans may increase depending on economic conditions at the time.

In short, there are many external factors that will affect 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 the customer for every dollar it takes in deposits it receives. It also means the bank then has no significant reserves available for expected and unforeseen contingencies. Central bank regulations also factor into how banks are managed and impact their loan to deposit ratio.

## LDR Calculation Formulas

The formula for calculating the Loan to deposit ratio (LDR) itself refers to PBI No. 17/11/PBI/2015. Loan to deposit ratio (LDR) as a comparison between total loans disbursed and total receipts. The following is the loan to deposit ratio formula:

LDR = (Loans Provided / Total Funds Received) x 100%

The credit used in the self-calculation formula includes the volume of credit extended to third parties (where credit to other banks is not included) then divided again by funds from the bank’s capital, these third party funds themselves include savings, demand deposits, and deposits (excluding inter-bank ), and securities issued. Meanwhile, the soundness level of a bank based on the Loan to deposit ratio (LDR) is as follows:

• The minimum loan to deposit ratio (LDR) allowed by BI is 78%.
• The maximum loan to deposit ratio (LDR) allowed by BI is 92%

A healthy loan to deposit ratio in general ranges from 78% -92%. However, under certain requirements the maximum loan to deposit ratio (LDR) limit was then relaxed to 94%, that is, if the gross credit NPL (Non Performing Loan) is met and the MSME NPL is below 5%. Meanwhile, according to central bank regulations, the tolerance limit for the loan to deposit ratio is 85% -110%.

## Factors Affecting LDR

The cause of the rise and fall of the Loan to deposit ratio (LDR) can then come from the internal and external conditions of a banking company. Although in general, several factors then have the potential to change the Loan to deposit ratio (LDR), including:

• The economic conditions of the people also influence the demand for credit and the amount of deposits. If Third Party Funds slow down, there will be a tightening of the Loan to deposit ratio (LDR). The trend of lending will also slow down, and the bank’s loan to deposit ratio (LDR) will also loosen. This was also influenced by the rapid growth of third party funds. If there are ups and downs in interest rates as a monetary policy set by the central bank. This will then affect the Loan to deposit ratio (LDR), that is, if interest rates are low, the demand for credit may also increase.
• Capital Adequacy Ratio (CAR) as a ratio that shows how far all bank assets contain risk (loans, securities, investments, claims on other banks) are also financed from the bank’s own capital funds in addition to obtaining funds from sources outside the bank, such as loans (debt), community funds, and others (Dendawijaya 2009:121).
• The Capital Adequacy Ratio (CAR) ratio is also used to measure the adequacy in terms of capital owned by a bank in supporting assets or generating risks, for example, in loans. The higher the Capital Adequacy Ratio (CAR), the stronger the bank’s ability to bear various risks of productive assets and any risky loans. Furthermore, the factors that influence the Loan to Deposit Ratio (LDR) are the quality of earning assets as investment in securities, credit and other investments that have the potential to provide benefits to the bank.
• Earning asset quality includes research on asset quality based on allowance for impairment losses on earning assets (based on PBI Number 14/15/PBI/2012). With the amount of reserves formed then it shows that the quality of the bank’s productive assets has decreased so that revenue until finally received by the bank has decreased. Revenue itself also decreased causing a decrease in capital which had an impact on reducing the ability of banks to finance risky assets (credit).
• Operating costs to operating income (BOPO) with a comparison between operating costs and operating income in measuring the level of efficiency and the ability of banks to carry out their operations (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 are in generating high income from credit (loans).
• The net open position also limits the bank’s risk in foreign currency transactions, thus affecting the fluctuating exchange rates. The net open position of a bank is also used in limiting speculative transactions and maintaining the sources and use of foreign currency funds in the bank. Based on Bank Indonesia regulation number 17/5/PBI/2015 dated 29 May 2015, the maximum net open position promised by Bank Indonesia is 20% of the bank’s capital. So it can be concluded that if the PDN ratio increases, the Loan to Deposit Ratio (LDR) decreases.

## Loan to Deposit Ratio Calculation Function

The Loan to Deposit Ratio (LDR) will assist investors in observing the condition of a bank, whether it is feasible to operate, and what its financial condition is, whether the receipt of funds has also increased or decreased. 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. In addition, the Loan to Deposit Ratio (LDR) also shows the quality of the bank in serving and caring for customers.

If the deposit of funds increases, then the customer also increases. On the other hand, the bank will then lend a lot of funds to customers, thereby reducing the level of income. Banks that lend funds to their customers will also generate low profit margins.

However, a balanced Loan to Deposit Ratio (LDR) is the best way for banks. With the increasing number of deposits that are lent, it is possible that there will be a decline in the economic level. However, if too few deposits are lent then assets tend not to increase and are in a stable state.

Within the scope of the company, the Loan to Deposit Ratio (LDR) is also known as the debt to assets ratio. The function itself is similar to the loan to deposit ratio, except that the debt to assets ratio is used to measure the 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 a company’s ability to pay short-term debt. Both are then included in the indication of the debt to assets ratio.

Banking itself requires the Loan to Deposit Ratio (LDR) as an assessment tool that shows how healthy the business activities are being carried out by a banking company. Other functions of the Loan to Deposit Ratio (LDR) include serving as an indicator of bank health, as well as a standard indicator for evaluation of Anchor Banks or Anchor Banks (minimum LDR of 50%).

As a determinant of the size of the bank’s Minimum Statutory Reserves (GWM). As one of the conditions for tax relief given to banks for mergers. Meanwhile, customers and investors who plan to deposit funds with a bank, the Loan to Deposit Ratio (LDR) figure itself is an indication of how well the bank is then operated.

## Book Recommendations Regarding Loan to Deposit Ratio

### 1. Smart Banking Series, Commercial Bank Credit According to Banking Theory and Practice

The book Smart Banking Series, Commercial Bank Credit According to Banking Theory and Practice is the third book published by author A. Wangsawidjaja. It is hoped that the book material for Commercial Bank Credit According to Indonesian Banking Theory and Practice will provide input as an introduction to understanding various conventional banking credit transactions and commercial bank credit law, including the general settlement of conventional commercial bank bad loans.

The material for this book is prepared based on the author’s practical experience, both as a banking practitioner in BNI branch offices, regional offices and BNI big offices from the period 1970 to 1999. In this book the author also adds the author’s practical experience as an Advocate, Partner in Law Offices of Remy & Darus and Law Offices Of Remy & Partners from 2000 to 2013, as well as founder and partner at WKI & Associates (www.kantor Hukum dki.com) from 2013 to present, which provides consultancy conventional banking law and Islamic banking to their clients.

The author completed his Bachelor’s degree at Sriwijaya State University Palembang (UNSRI), Master’s degree in Law at the University of Indonesia (UI) Jakarta, and Doctoral degree at Syarif Hidayatullah State Islamic University (UIN Syarif Hidayatullah) Jakarta. The material in this book was given as lecture material by the author in the Banking Law course at the Postgraduate Law Masters program at the University of Indonesia (UI), University of Surabaya (Ubaya), Jakarta Military Law College (STHM), and the Indonesian Banking Development Institute Jakarta ( LPPI), a writer at that time (2000-2011) as an assistant to Prof. Dr. Sutan Remy Sjahdeini, SH, as a professor of Banking Law.

The author also provides material for this book in the form of papers which the author presents in several banking seminars, workshops, as well as in-house training at several conventional banking institutions and Islamic banking, as well as non-banking institutions related to banking business activities.

### 2. Sovereign People’s Credit Union

The presence of this book is to contribute to a more complete literature on credit cooperatives. A cooperative that is characterized by a movement for freedom from poverty and community empowerment for people who are considered “weak”, marginalized, but are actually rich and empowered. The scarcity of literature on the cooperative movement, especially credit unions that adhere to the principles of Rochdale, and the many misunderstandings that credit cooperatives are just savings and loan cooperatives in the style of capital investment, led to the publication of this book.

Much of what is written in this book is not merely sourced from existing literature, but moreover is based on the author’s first experience who has been closely and deeply involved in establishing, managing, and spreading the People’s Sovereignty Movement Credit Unions to various regions of the country over the last 20 years.

One area that plays a very important role in the banking business is the credit business. Therefore, it is necessary to have credit staff who are competent, able to contribute by adhering to the principle of prudence, and capable of producing sound productive assets as expected. This Banking Credit Business Book includes a Senior Credit Officer and Credit Policy Module which provides a minimum reference that must be owned by a prospective bank credit manager or manager.

This book is a continuation of the book Managing Credit in a Healthy Way (Module Credit Officer). The main source of this book is the various training modules and materials implemented by various banks as well as existing practices in the Indonesian banking industry. By mastering the contents of the book, the reader will have the minimum ability to become a bank credit manager.

The first part covers credit portfolio management, credit planning and strategy, credit management and monitoring, non-performing loan management, and credit monitoring. The second part includes establishing a credit strategy, factors that need to be considered in formulating credit policies, compiling credit products, planning, monitoring realization, and evaluation/performance measurement, as well as formulating general credit policies and guidelines.