Net Interest Margin:
State-run lender Indian Overseas Bank (IOB) has taken various steps to offset the impact on net interest margin (NIM) from the repo rate cut affected by the Reserve Bank of India (RBI) recently.
- NIM is a financial metric used to measure the profitability of a bank or financial institution’s lending activities.
- It represents the difference between the interest income generated by the institution’s assets (such as loans and investments) and the interest paid on its liabilities (such as deposits and borrowed funds), expressed as a percentage of the average earning assets.
- It indicates how effectively a bank is generating interest income from its interest-earning assets relative to the interest it pays on its interest-bearing liabilities.
- This metric helps prospective investors determine whether or not to invest in a financial services firm by showing its interest income versus their interest expenses.
- Simply put, a positive NIM suggests that an entity operates profitably, while a negative figure implies investment inefficiency.
- NIM is calculated using the following formula:
- NIM = Interest Income − Interest Expense/Average Earning Assets
- Interest Income: The revenue earned from interest on loans, mortgages, securities, and other interest-bearing assets.
- Interest Expense: The cost incurred from paying interest on deposits, borrowings, and other interest-bearing liabilities.
- Average Earning Assets: The average value of assets that generate interest income, typically calculated over a specific period.
