Banks may introduce more attractive deposit schemes soon, either by raising deposit rates or providing other forms of incentives, due to the higher loan-to-deposit (LD) ratio of banks, says Sunway University economics professor Dr Yeah Kim Leng.

"With the LD ratio hovering at the 90% level, banks are likely to intensify their campaigns to boost fixed and savings deposits," he points out.

Yeah says the competitiveness will be determined by the demand for loans, where strong growth will require banks to push for higher deposits or seek out more expensive funding via the debt capital markets.

"There will be more volatility as the debt capital markets are tied to the prevailing financial conditions," he adds.

Yeah says banks could also "reduce lending to maintain the appropriate LD ratio, albeit at the expense of missed opportunities in terms of higher business volume and profit".

His comments come on the back of reports that Malayan Banking Bhd (Maybank) had the highest LD ratio in the local banking sector (99.2%) as at March while the banking sector as a whole was contending with slower deposit growth against loan expansion.

In the report, a CIMB analyst noted that the local banking sector's LD ratio had risen from 76.2% in February 2012 to 90.4% in June this year. However, he added that more indicators needed to be taken into consideration to come up with a more realistic assessment of liquidity.

"Indicators such as loan-to-fund ratio and capital have increasingly become more reflective of the lending capacity of banks as they take into consideration the other sources of funding that can be tapped by the banks," he says.

According to the analyst, one of the key reasons for the lagging LD ratio is the prevailing low interest rates which have caused depositors to shift to higher-yielding vehicles or assets, such as unit trusts and stock investments.

"A second reason is the decline in household savings due to weak wage and income growth. Third, a rise in the cost of living has resulted in squeezed savings for households and this has affected deposits," says Yeah.