Non-Interest Income

What is Non-Interest Income?

The non-interest income is the revenue income generated from the non-core activities by the banks and financial institutions (loan processing fee, late payment fees, credit card charges, service charges, penalties, etc.) and play a vital role in its overall profitability.

Explanation

  1. The core activities of any bank or financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more is to accept deposit and from the accumulated deposits bank lends money. Thus, a bank earns interest income by lending money to the borrowers at a higher rate and pay interest on the deposit accounts at a relatively lower rate. The difference between the interest earned and interest paid is called the net interest income. Thus, in the banking business models, the net interest income is the operating revenue generated from the core activities of the business.
  2. However, it is not the only source of income a bank or financial institution may have during the year of operation. The total income of any Bank or financial institution is the sum of interest income and non-interest income. It is the other revenue streamsRevenue StreamsRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients.read more which is not directly attributed to lending the money.
Non-Interest-Income

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For eg:
Source: Non-Interest Income (wallstreetmojo.com)

Examples of Non-Interest Income

  • For example, assume XYZ Bank lent the US $ 1000,000 to ABC Inc. at the rate of 6% p.a. for 10 years equated repayment. Let us assume the bank earned a total interest income of US $ 60,000 from ABC Inc. However, at the time of sanction of the loan, XYZ bank charged 0.5% of loan amount towards Loan origination fee, an upfront payment of US $ 500 towards the other service charges.
  • Now, the amount of US $ 5000 (as Loan origination fee) and the US $ 500 (as other service charges) is also income for the bank, but this US $5,500 is not coming from interest charges. Thus this income is classified in the books of XYZ Bank as Non-Interest Income.

List of Non-Interest Income for Banks

List of Non-interest income includes income earned from the non-core activities of the banking business, such as:

  1. Loan processing fee
  2. Loan origination fee
  3. Late payment charges,
  4. Foreclosure charges
  5. Over limit charges,
  6. Credit card annual charges,
  7. Cheque book issue charge
  8. Insufficient funds charges,
  9. Service charges
  10. Dishonor charges
  11. Penalties

Significance

  1. Generally, for any business who manufacture or trade goods, or provide any kind of service the non-interest income is considered the revenue generated from the core activities of business such as the sale of goods or services. However, only in the case of banking and the financial institution, the interest income is considered revenue generated from core activities. It is because the critical operational activity for any bank or financial institution is accepting money deposits and lending money. This is considered income from non-operating activities of the business.
  2. However, it becomes significantly important during the economic slowdown or financial crisis when the banks face difficulties in lending money or when the bank lends money at lower interest rates. Due to any of these, banks struggle to maintain their margins. In such scenarios, the earning inflow from other non-interest income becomes significantly crucial for the banks to offset the loss due to the lower rate of interest.
  3. The following table shows the last ten-year trend of interest income and non-interest income of all the US commercial banks. One can observe clearly the when the interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more of the banks decreased due in 2009 due to financial crisis, when banks were not ready to lend any further money, the % of non-interest income increased significantly.

Non-Interest Income as a % of Interest Income

YearNumber of Commercial
Banks
Interest IncomeNon-Interest IncomeNon Interest Income
as % of Interest Income
20087077530.61194.1736.59%
20096829482.34242.7250.32%
20106519481.65216.6944.99%
20116275455.65213.0446.76%
20126072444.66227.6651.20%
20135847430.48231.953.87%
20145607429.42227.8453.06%
20155340438.2233.5653.30%
20165112471.9232.7449.32%
20174918524.35235.9244.99%
20184717610.05254.3441.69%

United States Commercial Bank (US $ in millions)

Drivers of Non-Interest Income

Conclusion

The non-interest income is generated from non-core activities of banking and financial institutions. It plays a vital role in the overall total income of the banks. Mostly, the non-interest income is affected by the extent of interest income.

This has been a guide to What is Non-Interest Income & its Definition. Here we discuss the list of non-interest income in Banks, its significance along with example and drivers. You can learn more about from the following articles –

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