NIM (Net Interest Margin) — Banking Glossary · BankAI.fyi
The spread between what a bank earns on loans and what it pays on deposits. The single most important profitability metric in banking — every basis point moves markets.
What is NIM?
Net Interest Margin (NIM) = (Net Interest Income ÷ Average Interest-Earning Assets) × 100
In plain English: it’s the profit margin on a bank’s core lending business. If a bank lends at 10% and funds itself at 5%, its gross NIM is 5%. After accounting for NPA provisions, non-performing loans that stop paying interest, and other adjustments, you get the reported NIM.
Why NIM is the metric analysts obsess over
Every analyst covering an Indian bank watches NIM obsessively because:
- It directly drives Net Interest Income (NII) — the largest revenue line for most banks
- NIM compression of even 10–15 basis points can wipe out a full quarter of earnings growth
- NIM trajectory is a proxy for competitive position, deposit franchise strength, and loan mix quality
NIM benchmarks (FY26)
| Bank | Reported NIM |
|---|---|
| Kotak Mahindra | ~5.1% |
| HDFC Bank | ~3.5% |
| ICICI Bank | ~4.3% |
| Axis Bank | ~4.1% |
| SBI | ~3.2% |
| IndusInd Bank | ~4.3% |
Kotak’s structural NIM superiority comes from its high CASA ratio and conservative funding mix. SBI’s lower NIM reflects its large PSL book and public sector mandate.
What drives NIM
Upward pressure on NIM:
- Higher CASA ratio → cheaper cost of funds
- Shift toward higher-yielding loans (MFI, personal, SME) in the loan mix
- Repricing of floating-rate loans as base rates rise
Downward pressure on NIM:
- Rate cuts (loans reprice faster than deposits)
- Competition for deposits → higher FD rates
- Rising NPAs → interest income foregone on bad loans
- Shift toward home loans / large corporate loans (lower yield)
The NIM compression cycle in Indian banking
FY26 has seen NIM compression across most private banks. The mechanism:
- RBI cuts rates → MCLR-linked loans reprice down quickly
- FD rates stay elevated as banks compete for retail deposits
- NIM shrinks until deposit rates also compress
This is why banks with high CASA ratios (Kotak, ICICI) are more resilient — their funding cost is partly insulated from deposit rate wars.
For credit analysts
Key NIM questions in a bank credit assessment:
- Is NIM expanding or compressing on a like-for-like basis?
- What’s driving the change — loan mix, funding cost, or rate cycle?
- Is management guiding for NIM stability, and is that credible given deposit competition?
- How does NIM compare to peers with a similar loan book mix?
Never compare NIM across banks with different loan mixes without adjusting — a micro-lending bank should have much higher NIM than a corporate lender, simply because of risk premium.