What is Loan-to-Deposit Ratio (LDR)?

The Loan-to-Deposit Ratio (LDR) is a financial metric used by banks to assess their liquidity and financial health. It represents the ratio of a bank’s total loans to its total deposits. The LDR is a measure of how effectively a bank is utilizing its deposits to lend and generate income.

Formula:

Loan-to-Deposit Ratio (LDR)=Total LoansTotal Deposits×100\text{Loan-to-Deposit Ratio (LDR)} = \frac{\text{Total Loans}}{\text{Total Deposits}} \times 100Loan-to-Deposit Ratio (LDR)=Total DepositsTotal Loans​×100

Explanation:

• If a bank has high LDR, it means that a large portion of its deposits is being lent out. While this can lead to higher earnings, it may also reduce liquidity, making the bank more vulnerable in case of a sudden demand for withdrawals.
• If a bank has low LDR, it means that it is holding more deposits relative to loans. This can indicate a conservative lending approach, but it may also mean the bank is not maximizing its profit potential.

Ideal Range:

• Generally, an LDR between 80% and 90% is considered optimal for banks. It reflects a good balance between loan creation (profitability) and liquidity (risk management).
• An LDR above 100% means the bank has lent more money than it holds in deposits, which can be risky, as the bank may struggle to meet withdrawal demands.
• An LDR below 75% might indicate underutilization of deposits, reducing the potential for generating interest income.