RAS question
Net Interest Margin (NIM) of a bank refers to:
Correct answer: (D) Difference between interest earned and interest paid as a percentage of assets.
Net Interest Margin is the excess of a bank's interest income over its interest expense, expressed as a percentage of its assets.
Explanation
Net Interest Margin, or NIM, captures the interest spread earned by a bank on its asset base. The given formula is (Interest Income - Interest Expense) divided by Average Earning Assets, and the RBI working paper similarly defines NIM as interest income less interest expense scaled by total assets. This is why option D is right: it is not a measure of total profit, capital strength or the loan-deposit mix, but a focused indicator of how effectively the bank deploys funds to generate income from credit and investment operations. A higher NIM, at the bank level, generally supports profitability because the bank is earning more interest relative to what it pays out.
Why the other options are wrong
- (A) Total profit includes more than the specific interest spread that NIM measures, so it is broader than the NIM concept.
- (B) Capital adequacy ratio measures capital strength, while NIM measures interest income minus interest expense relative to assets.
- (C) Loan to deposit ratio compares lending with deposits, whereas NIM concerns the margin between interest earned and interest paid on the asset base.
Concept
This tests banking profitability ratios within the Indian Economy syllabus. It recurs in RAS because NIM links bank intermediation, asset use and profitability in one compact indicator.