Source: BS
Context:
Following the RBI’s repo rate cut of 25 bps in December 2025, scheduled commercial banks are expected to experience further compression in Net Interest Margins (NIMs). This comes amid a high credit-deposit (CD) ratio and slower adjustment of deposit rates compared to lending rates.
Net Interest Margins (NIMs)
Net Interest Margin (NIM) is a key financial metric used in banking that measures how profitable a bank is in terms of generating income from its lending activities relative to the interest it pays on deposits and borrowings.
It tells how effectively a bank is earning from its core business — lending and investing, compared to what it pays out as interest to depositors and lenders.
Formula
NIM = (Interest Earned – Interest Expended) ÷ Average Interest-Earning Assets × 100
- Interest Earned: Income from loans, advances, government securities, investments, etc.
- Interest Expended: Interest paid on deposits, borrowings, and other funding sources.
- Interest-Earning Assets: Loans + advances + investments that generate interest.
Why NIMs Matter
1. Indicator of Bank Profitability
Higher NIM means the bank earns more margin from lending versus what it pays on deposits.
2. Reflects Efficiency of Banking Operations
Shows how well a bank manages its interest rate risk, asset–liability mix, and pricing strategy.
3. Impacts Overall Net Profit
A bank with stronger NIMs usually reports better Net Interest Income (NII) and stronger bottom-line growth.
