“Bond yields fell significantly during the quarter, creating an opportunity for banks to book profits by selling a portion of their government securities holdings,” said Madhavankutty G, chief economist, Canara Bank. He added that the Reserve Bank of India’s (RBI) open market operations (OMOs) supported banks in offloading these securities. RBI started conducting OMOs to infuse liquidity from January this year.
Other income of banks includes fees and commissions, recovery from written-off loans, gains from treasury operations and sale of investments. Public sector banks (PSB) registered higher treasury gains as they hold higher level of government securities, which serve as collateral for repo transactions with the RBI and to meet statutory liquidity ratio requirements.
Among PSBs, the country’s largest bank State Bank of India reported 40% increase in other income in the fourth quarter while its net interest income (NII) rose by 2.7%. Bank of India, reported 46% growth in net profit, driven by a 48% surge in other income. Its net interest income (NII), on the other hand, rose by just 2.1%. Bank of Baroda’s other income jumped 24%, while NII fell by 6.6%.
The yield on the benchmark 10-year bond has declined from 7% on April 1, 2024 to 6.58% on March 31 this year, reflecting a fall of 42 basis points (bps). During the fourth quarter, the yield declined by 20 bps. Bond yields and prices move in the opposite directions, which means falling yields pushes up bond prices thereby making it lucrative for banks to sell bonds and book profits.
“It was a challenging quarter for banks, with elevated funding costs and difficulties in mobilising deposits, but the rise in other income helped cushion the pressure on profit margins,” said Narendra Solanki, research head at Anand Rathi Shares and Stock Brokers.The share of other income in total income tends to increase in the March quarter every year as banks push for recoveries from written off loans.Interest income growth has been muted for banks this year due to weak credit demand, which moderated from 16% in FY24 to 12% in FY25. Also tighter liquidity in the fourth quarter kept the cost of funds high which squeezed net interest income.
The trend of higher other income is likely to continue in the current financial year, say experts. “Other income is expected to remain elevated this year, largely driven by healthy treasury gains,” said Madhavankutty G highlighting that given the likelihood of surplus system liquidity, bond yields are expected to decline further thereby promoting banks to realise profits from the sale of government securities.
