What it is
A bank is a middleman. It pays depositors, say, 6% and charges borrowers, say, 10%. The difference, on all the money it handles, is net interest income (NII).
NII is usually two-thirds or more of everything a bank earns. When people say 'the bank's margins are under pressure', they mean NII is growing slower than the balance sheet.
NII is the rupee amount. The interest spread is the same idea as a percentage.
How it is calculated
Net interest income = Interest income − Interest expense.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's net interest income for FY 2082/83 was Rs 1,700.93 crore (interest income Rs 3,795.54 crore minus interest expense Rs 2,094.61 crore).
What good looks like
Rising year on year, faster than operating expenses. If loans grew 15% but NII grew 5%, the margin shrank. Compare NII to total assets across banks to see who earns more per rupee.
Watch out
- NII can rise simply because the bank grew; check it against assets.
- A high NII with a high impairment charge means the bank is earning more by lending to riskier borrowers.
- Falling market rates compress NII with a lag.
In Nepal
NRB's interest spread cap limits how wide NII can be as a percentage of assets. Banks report the spread in the quarterly ratio schedule.
Questions
No. From NII the bank still has to pay for bad loans, staff, offices and tax. Net profit is what is left after all that.
NII is in rupees; the spread is the percentage gap between lending and deposit rates. Both describe the same margin.