Net interest margin
NIM
Net interest margin is the interest a bank earns minus the interest it pays, as a percentage of the funds it holds, after allowing for money it could not lend out.
Formula
Net interest income
Net Interest Income = Interest Earned − Interest Paid
NIM
NIM (%) = Net Interest Income ÷ Average Interest-Earning Assets × 100
Benchmark: Higher is better; distinguish it from the simple spread
Reading the number
The simple spread first. A bank has ₹100 at a 5 percent interest cost, so it pays ₹5, and lends at 12 percent, so it earns ₹12. The difference, ₹7, is the spread. But spread is not yet NIM.
Five people deposit ₹100 each, ₹500 at 5 percent, so total interest paid is ₹25. The bank cannot lend all ₹500. Some must sit as reserves with the RBI and some simply does not go out. Suppose only ₹400 is lent at 12 percent, earning ₹48. Net interest income is ₹48 − ₹25 = ₹23. NIM tells you what margin remains after paying every depositor and accounting for the un-lent funds.
Indian example
Related ratios
Glossary terms
From the research
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