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Loan to Deposit Ratio

Loan to deposit ratio is financial ratio used for banks or other financial institutions. This ratio compares bank’s loan portfolio to deposit portfolio and measures financial liquidity of the institution. 

 

The core business of every commercial bank or other lending institution is to take deposits from clients and to lend that money to other clients that need capital. In this case the deposit is a liability for the bank, and the loan is an asset. Deposits are quite stable source of funding for a bank (it depends on the structure of deposits) and loans are riskier asset than other financial assets because of lower market liquidity

 

Loans to deposit ratio formula


Loans to deposit ratio = Loans provided to clients / Deposit from clients

 

High loan to deposit ratio may indicate several things:

  • Bank is exposed to higher risk during short period because if clients would start to withdraw their deposits, bank could not to take loans back quickly and would face liquidity problems.
  • Loans usually are the main profit generator for banks and under normal conditions loans are more profitable assets than other assets of the bank with adequate risk. Because of this reason such banks are expected to generate higher net interest income.

 

 






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