How Is Net Interest Margins For Banks Calculated?

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Net interest margins or NIMs is an important parameter, when analyzing the financial performance of a bank. It can also be helpful when computing these set of margins for non banking finance companies.

The calculation of NIM is pretty simple - it is the difference between the interest that a bank earns on the amount it lends and the interest it gives on its term deposits.

How Is Net Interest Margins For Banks Calculated?
Now let us understand the calculation with a simple example. If the bank receives an interest amount of Rs 100 from the lenders it has lent to and it pays an interest of Rs 98 on this to its depositors, than the banks net interest margin would be Rs 2.

You can also compute net interest margin as a per cent, which is always the case. If the bank's average total interest-bearing loans equals to Rs 100 and the bank has garnered an interest income of Rs 3 and paid-off interest on those assets at Rs 1, than the banks net interest margin would be 2 per cent.

So, what can you actually gauge from the net interest margin. If the NIMs are low, than there maybe poor credit growth in the economy. The company will have to have a better way of managing its assets, in order to expand its NIMs.

It is extremely rare that we find the net interest margins of the bank as negative. A positive net interest margins and its regular expansion means the bank is able to channelize or make use of its deposits or assets in a much better way.

What do shareholders look at?

Some shareholders look at whether these margins have expanded in a meaningful way over the last few quarters. However, this ratio cannot be looked at in isolation, as we have to consider other factors like non performing assets (NPAs).

This ia another key figure that one takes a look at along with NIMs. Non performing assets are those assets, where there are bad debts on the loans that are payable.

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