The NIM of a bank is computed by dividing net interest income by the average advances. I applied this formula to compute NIM of a state bank of India. But, i did not get the value of NIM which was reported by the company in its directors report. (i.e., 2.84 for the financial year 2016-17)
i am enclosing the extracts of the Income statement and balance sheet of the bank for the financial year 2016-17
please help me in this regard
Dear Srikanth
Looking at your NIM definition you used average advances in your denominator. Your denominator should include all earning (interest bearing) assets, i.e. advances plus balances with banks plus investments (except shares and subsidiaries and joint ventures). Details of the asset accounts is farther down in the balance sheet.
NIM is calculated as a percentage of interest bearing assets. For example, a bank's average loans to customers was $100.00 in a year while it earned interest income of $6.00 and paid interest of $3.00. The NIM then is computed as ($6.00 – $3.00) / $100.00 = 3%. Net interest income equals the interest earned minus the interest paid out to customers.
In particular, for a bank or a financial institution if the non-performing assets are high, their NIM will go down as the interest earning assets are that much reduced by non-performing assets.
There may be some adjustments for de-recognized income and provisioning.
Dear Srikanth
As nonperforming assets are in default, not earning interest, they are excluded in the NIM calculation.
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