Net interest margin

For most Indian banks, net interest income is the largest part of revenue, so NIM is the main engine of profit. It depends on two things: the yield on the bank's assets, which reflects what it lends to and at what rates, and its cost of funds, which depends on how much cheap money it can raise, especially current and savings account (CASA) deposits.

A worked calculation

Illustrative example. A bank has ₹1,00,000 crore of interest-earning assets yielding 9 percent and pays an average of 5.5 percent on ₹92,000 crore of deposits and borrowings. It earns ₹9,000 crore of interest and pays ₹5,060 crore, leaving net interest income of ₹3,940 crore and a NIM of 3.94 percent.

How rate changes move NIM

Since October 2019, new floating-rate loans to individuals and small businesses have been linked to an external benchmark, usually the repo rate, so they reprice within months. Fixed deposits keep their rate until they mature, and savings rates change rarely. When the RBI cuts rates, loan yields fall faster than deposit costs and NIM is squeezed; when it raises rates, NIM usually lifts at first. India went through both phases recently: the RBI cut the repo rate by a total of 1.25 percentage points in 2025, then raised it by 0.25 points to 5.50% in October 2026. The analysis of bank margins works through the numbers.

NIM is not profit

A high NIM can come from lending to riskier borrowers at higher rates. If they default more often, the extra margin disappears in credit costs. A lender with a 6 percent NIM and credit costs of 3.5 percent of assets earns the same risk-adjusted margin, 2.5 percent, as one with a 3 percent NIM and credit costs of 0.5 percent, while carrying far more risk.

Where to find it

Banks report NIM in their quarterly results presentations. To work it out yourself, take interest earned minus interest expended from the profit and loss account, and divide by the average of interest-earning assets at the start and end of the period.

Common mistakes

• Comparing NIMs across very different lenders. Unsecured personal loans and microfinance usually carry high NIMs for a reason.
• Using the gap between lending and deposit rates as the NIM. Reserves held under the CRR earn nothing, so the true margin is lower.
• Ignoring the credit-deposit ratio. When loans grow much faster than deposits, banks must pay more for deposits, which compresses NIM even without a change in the repo rate.

Questions investors ask

What is a good NIM for an Indian bank? There is no single level. It depends on the loan mix and the deposit franchise, so compare a bank with close peers and with its own history, and always next to its credit costs.

Why do bank margins fall when the RBI cuts rates? Because repo-linked loans reprice almost at once, while fixed deposits reprice only as they mature.