Metric Explainer: Net Interest Margin (NIM)
NIM measures the spread between interest a bank earns on its loans and the interest it pays on its deposits/borrowings. It's the banking equivalent of gross...
Simple definition
NIM measures the spread between interest a bank earns on its loans and the interest it pays on its deposits/borrowings. It's the banking equivalent of gross profit margin.
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"NIM = bank ka margin. Loan pe kitna interest liya, deposits pe kitna diya — beech ka farak."
Formula
NIM = (Net Interest Income (NII)) / (Average Interest Earning Assets) × 100
Where:
- NII = Interest earned on loans & investments − Interest paid on deposits & borrowings
- Interest-earning assets = Loans + Investments + Interbank lending
Why it matters
For banks and NBFCs, NIM is the primary revenue driver. Non-interest income (fees, treasury) is secondary. A wider NIM means higher profitability per rupee of assets deployed.
Good range
| NIM Level | Type of Lender | Examples |
|---|---|---|
| > 5% | Microfinance / Small-ticket NBFC | Bandhan Bank, Manappuram |
| 3.5–5% | Retail-heavy bank | HDFC Bank, Kotak |
| 3–3.5% | Diversified bank | SBI, ICICI Bank |
| 2–3% | Corporate-heavy / PSU bank | Bank of Baroda, PNB |
| 1.5–2.5% | Housing finance | HDFC Ltd, LIC Housing |
What drives NIM
| Factor | Impact on NIM |
|---|---|
| Loan mix | Retail (personal, credit card) → higher yield → higher NIM |
| CASA ratio | Higher CASA = lower funding cost = wider NIM |
| Rate cycle | Rising rates → NIM expands (loans reprice faster than deposits) |
| Competition | More competition → pressure to lower lending rates → NIM compression |
| Asset quality | NPAs don't earn interest → reduce effective NIM |
NIM expansion vs compression
| Scenario | NIM Impact |
|---|---|
| RBI raises repo rate | NIM expands short-term (MCLR reprices but deposits lag) |
| CASA ratio improving | NIM expands (cheaper funding) |
| Shift from corporate to retail lending | NIM expands (higher yield) |
| Deposit war / rate competition | NIM compresses |
| Growing NPAs | NIM compresses (interest not collected on bad loans) |
Red flags
| Signal | Risk |
|---|---|
| NIM above 6% persistently | Lending to very risky borrowers — check GNPA carefully |
| NIM declining 3 quarters consecutively | Structural pressure on spread or rising NPAs |
| High NIM but negative operating profit | Fee income and opex eating into the spread |
| NIM much higher than peers | Either niche (ok) or risky lending practices (not ok) |
The NIM-NPA tradeoff
Banks with the highest NIM often lend to the riskiest borrowers (microfinance, unsecured personal loans). High NIM is meaningless if it comes with 10% GNPA. Always pair NIM with GNPA/NNPA analysis.
Real example
| Metric | HDFC Bank | SBI | Bandhan Bank |
|---|---|---|---|
| NII | ₹92,000 Cr | ₹1,60,000 Cr | ₹9,000 Cr |
| Avg earning assets | ₹22,00,000 Cr | ₹50,00,000 Cr | ₹1,10,000 Cr |
| NIM | 4.2% | 3.2% | 8.2% |
| GNPA | 1.2% | 2.8% | 6.5% |
Bandhan has the highest NIM but also the highest GNPA — it lends to micro-borrowers at high rates. HDFC Bank achieves a strong NIM with low GNPA through retail focus and high CASA.
Related metrics
- GNPA/NNPA — Always pair NIM with asset quality
- Banking Sector Playbook — Full banking analysis framework
- NBFC Sector Playbook — NIM dynamics for non-bank lenders