Banks step up focus on fee-based income; treasury gains come under pressure

Further, bankers said that there is still room to reduce rates on term deposits, and bulk deposit rates have already declined

Banks are shifting focus to fee-based services, product offerings, and recoveries as treasury income in the July–September quarter (Q2) is expected to stay weak. This comes amid declining net interest income (NII) and net interest margins following the recent policy rate cut. Bankers said priority areas include selling priority sector lending (PSL) certificates and expanding wealth management services.

 

Executives also pointed out that there is still room to cut term deposit rates, while bulk deposit rates have already fallen. Together, these measures should help ease pressure on interest income.

 

“Treasury income this quarter will not be sufficient to support the bottom line due to hardening yields. So, banks are focusing on growing other income such as fee-based income and third-party product sales. Selling PSL certificates will be key, as the scope to grow in other areas is limited,” said a senior executive at a public-sector bank (PSB).

 

“Recoveries will also play an important role — both from written-off accounts and from National Company Law Tribunal or National Asset Reconstruction Company cases,” the executive added.

 

Other income for banks includes fees and commissions, recoveries from written-off loans, treasury gains, and sale of investments. Analysts noted that the top 10 banks reported a 13 per cent increase in fee income in 2024-25 (FY25), compared with a 7 per cent rise in NII. Fee income accounted for nearly one-fifth (18 per cent) of total income. Bankers expect fee-based income to grow another 12–13 per cent in Q2.

 

The ratio of core fee income (commissions, exchange fees, and brokerage) to total assets has also improved across most top banks. Union Bank reported a 10 basis points (bps) rise, while State Bank of India, HDFC Bank, ICICI Bank, and Axis Bank saw smaller gains of 2–5 bps. Kotak Bank and Bank of Baroda, however, posted a 4 bps decline, weighed down by Reserve Bank of India (RBI) restrictions on new customer onboarding.

 

In SBI’s FY25 annual report, Chairman C S Setty wrote: “We are committed to improving our profitability profile through disciplined cost management, optimising our asset mix, and expanding fee-based income streams. With strong current account savings account growth, digital cross-sell capabilities, and margin-sensitive asset allocation, we are building a scalable model for sustainable returns.” He said the strategy would help the bank navigate slowing credit growth and sustain profitability.

 

Since February 2025, the RBI has cut policy rates by 100 bps. Banks responded by lowering both lending and deposit rates — fresh loans by about 71 bps and fresh deposits by 87 bps. Yet, government bond yields have climbed after the June policy, when the RBI front-loaded a 50 bps cut and shifted its stance from accommodative to neutral. Since then, government securities (G-secs) yields have risen over 30 bps at both the short and long ends of the curve.

 

The benchmark 10-year G-sec yield fell from about 6.8 per cent at end-2024 to as low as 6.2 per cent in late May, before edging up to 6.3 per cent in June. It has since climbed to around 6.48 per cent. Bond yields and prices move inversely: when yields fall, prices rise — and vice versa.

 

“Treasury income won’t match April-June quarter (Q1) levels. Last quarter (Q1), we saw only modest fee-based income growth; this time we are projecting 12–13 per cent growth in Q2. We’ve also contained our cost of deposits and expanded our retail, agriculture, and micro, small and medium enterprise book,” said another senior PSB executive.

 

“This quarter (Q2), the focus is on the mid-corporate segment, which offers higher yields. We had already cut deposit and term deposit rates by 50–70 bps in Q1, and reduced savings rates by 25 bps effective this quarter. These moves should support margins,” the executive added.