Yield on Advances
The blended rate a bank earns across its whole loan book — money's selling price.
Why you care
If cost of funds is the purchase price of money, yield on advances is the sale price. Every pricing call trades higher yield against higher risk — and it's half of the spread your seniors track.
Run the numbers
A mixed loan book blends to ~10.3% yield (illustrative) — but the 14% unsecured slice brings the bad loans that erase the extra. Push yield too hard and you're borrowing tomorrow's losses to flatter today's margin.
Where this goes
Yield minus cost of funds, in rupees, is net interest income. Chase yield too hard and loans slide down the classification ladder. Yield itself moves when RBI changes rates — that journey is rate transmission.
Why you care
Yield on advances is the average interest rate a bank actually earns across its entire loan book — the "selling price" of money, and the other half of the spread alongside cost of funds.
If cost of funds is the purchase price of money, yield on advances is the sale price. The bank's core profit is the gap between the two. But yield isn't a single dial you turn up freely: chasing higher yield means making riskier loans (unsecured personal loans, microfinance) that pay more but go bad more often. So yield on advances is where the eternal banking tension lives — earn more now versus lose more later. For a credit analyst or RM, every pricing decision is a bet on this trade-off.
Run the numbers
A simplified ₹100 crore loan book (illustrative rates):
| Loan type | Amount | Rate earned | Interest |
|---|---|---|---|
| Home loans (secured) | ₹50 cr | 8.75% | ₹4.38 cr |
| Business loans | ₹30 cr | 10.5% | ₹3.15 cr |
| Personal/unsecured | ₹20 cr | 14% | ₹2.80 cr |
| Total | ₹100 cr | — | ₹10.33 cr |
Blended yield on advances = ₹10.33 cr / ₹100 cr = 10.33%.
Notice the unsecured ₹20 cr earns 14% — tempting. But if even a few of those loans stop paying and slide into classification trouble, the provisions wipe out the extra yield and then some. A bank that pushes its yield up by piling into risky lending is borrowing tomorrow's losses to flatter today's margin.
Where this goes
Yield on advances minus cost of funds, in rupees, is the bank's net interest income. Push yield too hard and loans deteriorate down the asset-classification ladder. And yield itself moves when RBI changes rates — that journey from policy to customer rate is rate transmission.