Definition
Yield on Advances
Yield on Advances is the average interest rate a bank earns on its loan book, calculated as interest income from advances divided by average advances.
Yield on advances reflects both the loan mix and the rate environment. A book tilted toward unsecured personal loans, credit cards and microfinance carries a higher yield than one dominated by home loans or large corporate term loans.
The gap between yield on advances and cost of funds is the lending spread, the core driver of a bank's NIM. After the RBI's external-benchmark regime, retail and MSME floating-rate loans reprice quickly with the repo rate, so yield on advances now moves faster through the rate cycle.
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.
- 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.
- Repo-Linked Lending Rate (RLLR)RLLR is a lending rate tied directly to the RBI's repo rate, so changes in the repo rate quickly flow through to borrowers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.