Loan-Deposit Ratio = Total Loans / Total deposits
Disadvantages of using Loan to Deposit Ratio (LDR) for
determining a Bank's Liquidity:
- The LTD ratio is sometimes biased upwards due to non-inclusion
of non deposit finance by Banks.
- LTD does not reflect the risk adjusted liquidity of the bank.
Higher loans given by banks may bring suspicion about the quality
of these loans. LTD is not risk-weighted as decribed in Basel
III.
- LTD doesn't tell us the number of lenders these loans were
given to. Dependence of Bank on a few big borrowers may hamper the
liquidity of the bank in case of default by those few lenders.
- LTD does not take into account the interest given to depositors
and interest received from the borrowers. Thus, the LTD may be
satisfactory but the interest on these loans and deposits may
change the bank's liquidity position.