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Sunday, January 19, 2014

NIM Vs. Interest Spread


Interest Spread and NIM (Net Interest margin) are often considered as the same but both terms are different. We know that a bank or a financial institution earns interest on their lending while they need to pay interest on their borrowing.

NIM is the ratio of the interest difference (Interest Received-Interest Paid) to Average Interest Earning Assets.

NIM= (Interest Earned-Interest Paid)*100/Average Interest Earning Assets

Interest Spread=Interest Income as Percentage of Total Lending-Interest Expense as Percentage of Total Borrowing

Illustration:

ABC bank has a total of borrowing of Rs. 5,000 million and its total lending is Rs. 4,000 million while its Interest Earnings and Interest Expenditures are Rs. 400 million and 200 million respectively.

Then,

NIM will be: (400-200)*100/4,000 or 5 %.

Interest Spread will be: (400*100/4,000)-(200*100/5,000) or 6%.

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