Calculation of Net Interest Margins (NIMs)
Net Interest Margin (NIM) is the difference between interest income generated by banks or other financial institutions and interest paid to the lenders such as depositors.
Net Interest Margin (NIM) is the ratio of net interest income to average interest earning assets.
NIM = Net Interest Income/ Average Interest Earning Assets
Here interest earning assets are loans or advances offered to borrowers by banks or NBFCs. So as to calculate NIM average of beginning to end of the period is considered.
For instance, interest income is Rs 100 crore and interest paid is Rs 50 crore. And, interest earning assets at the start of year are Rs 2,000 crore and interest earning assets at the end of year are Rs 2,200.
So, NIM = 100-50/ (2,000 + 2,200)/2
Net interest margin is always expressed as a percentage.
What does NIM signify?
A positive NIM signifies that the investment strategy is paying more interest that it costs and negative NIM means that the investment strategy cost more than it makes in the first place. However, it’s not wise to make comparison between NIMs of different banks because the nature of each bank’s lending and deposit activities varies a lot.