What It Means
Net Interest Margin (NIM) is the gap between what a bank earns on the money it lends and what it pays on the money it borrows, mainly deposits, expressed as a percentage of its average earning assets. It's the single number that best captures how profitable a bank's core lending business is, separate from one-off gains or fee income.
Net Interest Margin = (Interest Earned − Interest Paid) / Average Earning Assets × 100
- Interest Earned
- Total interest income from loans, advances, and investments
- Interest Paid
- Total interest expense on deposits and borrowings
- Average Earning Assets
- The average value of assets generating interest income over the period
Example
Say a bank earns ₹9,000 crore in interest income on loans and investments in a quarter, pays ₹5,000 crore in interest on deposits and borrowings, and holds average earning assets of ₹1,00,000 crore over that period. Its NIM works out to (9,000 minus 5,000) divided by 1,00,000, times 100, which is 4%. A NIM around that level is typical for a large Indian private bank; a lender with a riskier loan book can run meaningfully higher.
Warning
A higher NIM isn't automatically a better bank. It can also mean the bank is lending to riskier borrowers at higher rates, which shows up later as bad loans if that risk doesn't pay off.