Definition
Advances (Banking)
Advances are the loans a bank extends to borrowers, forming the main interest-earning asset on its balance sheet.
Advances include retail loans (home, auto, personal), MSME credit, corporate term loans and working-capital facilities. They are reported gross and net of provisions, and their composition drives a bank's yield on advances and risk profile.
Growth in advances is the engine of a bank's interest income, but it must be balanced against deposit growth (see CD ratio) and capital (see CRAR). The quality of advances determines NPA levels, making the loan book the central object of analysis for any Indian bank.
Related terms
- Yield on AdvancesYield on Advances is the average interest rate a bank earns on its loan book, calculated as interest income from advances divided by average advances.
- Non-Performing Asset (NPA)A Non-Performing Asset is a loan or advance on which the borrower has not paid interest or principal for 90 days or more, as defined by RBI norms.
- Credit-Deposit Ratio (CD Ratio)The Credit-Deposit Ratio is the proportion of a bank's deposits that it has lent out as advances, measuring how aggressively it is deploying its deposit base.
- Deposits (Banking)Deposits are the funds customers place with a bank in current, savings and term accounts, forming the bank's primary and cheapest source of funding.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.