Definition
Spread (Banking)
In banking, the spread is the difference between the yield a bank earns on its assets and the rate it pays on its liabilities, typically the gap between yield on advances and cost of funds.
The banking spread is a cleaner view of lending profitability than NIM because it directly compares what is earned on loans against what is paid for funds. A widening spread signals improving margins; a narrowing one warns of competition or rising deposit costs.
In India, intense competition for deposits and the rapid repricing of repo-linked loans make spreads volatile across the RBI cycle. NBFCs report spreads too, but their funding mix of borrowings and bonds makes them more exposed to capital-market conditions than deposit-taking banks.
Related terms
- Net Interest Margin (NIM)Net Interest Margin is the difference between the interest a bank earns on advances and investments and what it pays on deposits and borrowings, expressed as a percentage of average interest-earning assets.
- Cost of FundsCost of Funds is the weighted-average interest rate a bank or NBFC pays to raise the money it lends, covering deposits, borrowings and bonds.
- 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.
- Marginal Cost of FundsMarginal cost of funds is the cost of raising the next rupee of funds, used by the RBI's MCLR framework as the basis for pricing floating-rate bank loans.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.